| According to the Capital Asset Pricing Model (CAPM), the uncertainty aboutfuture profitability will increase the discount rate of future cash flows through thesystemic risk, thus affect the firm valuation. However, recent studies represented byPastor&Veronesi (2003), as well as option pricing theory based on the overalluncertainty of future earnings, have shown that the uncertainty in individual risk areaswould have different impact from traditional theories on the valuation.Based on the introduction of research background and significance, as well asreview of relevant theories, this paper uses all the listed companies in the Shanghai andShenzhen A-share Market from1990to2011as the research sample, and empiricallyexamines the effect of the uncertainty about average profitability on corporate valuation,measuring the uncertainty and valuation with firm-age and market-to-book ratio (M/B)respectively. More importantly, we test whether the information asymmetry will affectthe role of uncertainty on the valuation.The descriptive statistical results show that M/B declines over firms’ lifetime.Furthermore, we use Fama-MacBeth two-step regression method, controlling the effectof principal relevant factors, to come to the conclusion that the higher the uncertaintythe higher the corporate valuation. Taking into account that the information asymmetrybetween enterprises and investors and between investors will impede investors’ learningon uncertainty, thereby affect the corporate valuation, we use the cumulative excessreturn caused by annual reports announcement to measure the information asymmetrybetween enterprises and investors, as well as order imbalance and relative bid-askspread to measure the asymmetry between investors, and add their cross term withuncertainty into regression. It turns out that M/B decreases with uncertainty aboutaverage profitability, especially for firms that face more serious information asymmetry.In this sense, information asymmetry amplifies corporate valuation. |
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