The Existence And Essence Of Profit Growth Anomaly In China's Stock Market

This article discovers the profit growth anomaly within China's stock market.Since 2006,for those who exhibit high profit growth stability,stocks with greater profit growth momentum tend to outperform others on a riskadjusted basis.Meanwhile,this article also finds that,compared with net income,gross profit and net operating cash flow are better signals of companies' profit growth.Plus,this anomaly is less significant for small companies,and has become even more significant after 2011.These good news indicates that the strategy of selecting stocks with higher growth stability and greater growth momentum tends to favor larger firms,and seems to have become even more effective in recent years.The profit growth anomaly can be explained by sticky expectation among investors.With a simple model,this article first proves that in theory,under the condition of persistent signals and sticky expectation,higher growth predicts higher return of stocks.Then,it is found that stocks with higher cash flow growth stability really display sticky expectation.Given that cash flow signal is persistent,we finally understand the essence of profit growth anomaly in China's stock market,which is investors' sticky expectation of stock profit growth.