Stock Return With Profitability And Relative Leverage Which Based On Chinese And US Markets

Stock investment turn to one of the most popular investment instruments now. However, in the current environment of global stock market crash, how to conduct a reasonable investment has become an important issue. From the perspective of market to explore the influence factors of stock returns, CAPM and Three-factor model of Fama-French are widely accepted earlier. However, the empirical research of Frazzini(2013) proposed that market factors are not enough to explain the investment premium of Buffett, while the firm-specific characteristics and capital structure strategy influence stock returns a lot. From the perspective of company quality, this paper study influence of the expected company quality and relative leverage on the stock returns, and expected profitability and expected investment were constructed to represent expected company quality.First, this paper reviewed the literature and theory which studied the factors of stock returns. Then, it selected the financial and securities data of American from 1965 to 2014 and China from 2001 to 2014 as for sample empirical research. This paper joints profitability, relative leverage, market value BM, and momentum to make stocks regression analysis and study the relationship between profitability, relative leverage and stock returns. In addition, building four factors model by adding the relative leverage and profitability to classic FF portfolio analysis model to study the pricing function and ability in two markets is also this paper will do.Results showed that, in the US market, the stronger the profitability, the greater the relative leverage, the higher the stock returns, and portfolio analysis results show that the U.S. market there are obvious scale effect, value premium, premium relative leverage and earnings premium and the model with relative leverage and profitability are better in pricing than FF model. For the Chinese market, the relationship between profitability and stock returns is not significant and stable as in U.S. market, while in the Chinese market, the market pricing power of the four factors model of relative leverage and profitability is better than the American market. The major reasons which caused regression results of Chinese and US markets are different are that they have different macroeconomic environment and completeness and the number of years of data are different.