Cost Growth And Stock Return

The traditional capital asset pricing theory believes that the stock return rate depends only on systemic risk.However,due to information asymmetry,market friction,capital cost and other restrictions in the market,more and more research results reject the capital asset pricing model(Black and Scholes).(1973),Fama and Macbeth(1973)),the academic community turned to the discussion of multi-factor model,and the variables such as size,book-to-market ratio,profit-price ratio,and return on assets were gradually found to explain stock returns.Among the many characteristic variables,the relationship between earnings and its components and stock returns has been extensively discussed.In 2015,Fama and French incorporated profit into the five-factor model,which officially confirmed the ability of accounting earnings to predict stock returns.Ertimur,Livnat and Martikainen(2003),Jegadeesh and Livnat(2006),Huang et al.(2017)and other scholars also found that income and costs as part of the surplus also have significant predictive power on stock returns.However,few people in China study the earnings component,especially the ability of cost information to explain stock returns.This paper selects the cost growth rate as a measure of cost information and explores whether the cost information has predictive ability on stock returns in the Chinese stock market.In this paper,we use the portfolio method and the FamaFrench five-factor model to verify that the stock portfolio with low(high)cost growth rate has significantly higher(lower)stocks return at the portfolio level.Secondly,the Fama-Macbeth cross-section regression method is used to verify that the cost growth rate has a significant negative relationship with the expected stock returns at the individual stock level,and this negative relationship controls the scale,book-to-market ratio,momentum,return on assets,After 14 factors such as return on net assets,accrued surplus,and profit-to-price ratio,it is still significant,indicating that the cost increase contains excess information with 14 factors.Thirdly,in view of the special situation that there is no exit mechanism in China's stock market,we excludes the 30% stock sample with the smallest market value for robustness test,and uses three cost growth substitute indicators to prove that our results are stable in different situation.Finally,this paper attempts to explain the results from the perspective of arbitrage cost and investor response.We believe that erroneous pricing caused by arbitrage costs is the possible reason.The research results of this paper have theoretical and practical contributions.In theory,the research in this paper makes up for the status quo of relevant domestic research gaps.The research results show that the cost growth contains different interpretation information from 14 indicators such as profit,which lays a foundation for further research.At the same time,this paper uses Fama and The French fivefactor model provides new evidence for the applicability of the model in Chinese stock market.In practice,the research results of this paper can guide investors to make investment decisions.The negative relationship between cost growth and stock returns provides investors with new perspectives and new methods for constructing investment strategies.At the same time,this paper finds the possible reasons for the wrong pricing caused by arbitrage costs,which provides a basis to help improve the capital market and arbitrage mechanism and improve market effectiveness.