The Effect Of Industry On Stock Returns

The stock has a long history，and it plays an important role in asset allocationarea. Stock returns have been discussed for centuries, and a huge theoretical systemhas been developed. This system includes portfolio theory of Markowitz, capital assetpricing theory of Sharpe, and arbitrage pricing theory of Stephen Ross, whichconstitute important parts of the modern classical finance theory. Theexperience-based factor model is gaining an increasingly large influence. This modelholds that the fundamentals factors that affect stock returns can be divided intothree aspects——macroeconomic factors, industry factors and factors of listedcompanies. Among these, macroeconomic factors and companies factors have beenfully investigated.Although the importance of industry factors has been widely accepted, thereare still some reasons prevent investors investigating it by quantitative methods, suchas multiple classification standards and lack of data. Currently, it is common to usequalitative methods, like market structure theory and industry life cycle theory, toanalyze industry factors of stocks.This essay hope to deepen the understanding of the role industry factor plays in investment by more quantitative methods. As the differences between industries arehuge, we need to divide industries into several general categories. Within the samegeneral category, indicators that reflect the industry characteristics should be used asthe industry factors.The dissertation takes an example of manufacturing stock from Chinas stockmarket to examine the industry influence on stock returns. We find that, the lowprofitability of manufacturing nowadays, lies in the over-high operating leverage andheavy debt burden. Considering these industry characteristics, we propose twoindicators——Capacity utilization and Asset-liability ratio——to study the effects ofindustry factors on stock returns.The essay uses the panel data of manufacturing stock in Chinas stock marketfrom2000-2010, gets to the conclusion that as indicators of company profitabilityand financing burden，capacity utilization and asset-liability ratio, which are on thebehalf of the industry factors, have strong explanatory power on manufacturing stockreturns.