Stock Valuation And Investor's Learningabout Firms' Average Profitability

The economic implications of learning are vast.Whether investors learn about firms' future profitability is a topic of interest to regulators,managers and to the investors themselves.If investors' uncertainty about firms' future profitability is resolved with firms' ageing in the aggregate level of a market,it implies that the capital resources are being more efficiently allocated,thus,improving the total market welfare.Pastor and Veronesi(2003)propose a stock valuation model where investors learn about firms' future average profitability.They have empirically tested and confirmed their theory in the US market.In developed economies,such as the US,the weight of institutional investors tends to very high holding markets' aggregate value around its fundamentals with a relatively high efficiency.China's A-shares market investors' population composition is relatively different from other economies,the proportion of individual investors is considerably higher.Their learning behavior pattern has a significantly stronger impact on stock valuation.This study aims to answer two main questions: 1)Do Chinese A-shares abide by Pastor and Veronesi(2003)learning theory? 2)How does firms' ownership type impact investors' learning? Using an A-shares sample spanning the years 1991-2016 it is found that: 1)investors' uncertainty about firms' future profitability is convex over firms' age,rejecting the learning theory,2)investors' uncertainty about private firms' average profitability is consistently higher throughout firms' age.The results for the first question are strongly influenced by the 2014-2016 stock market bubble.M/B convexity over firms is most likely caused by the bubble,which crash is also captured by the data.Nevertheless,they also indicate that the proportion of institutional investors in China's A-shares market is too small to be able to enforce market efficiency.The results for the second question cannot be explained with informational issues.In the light of the property rights theory and the agency costs theory,uncertainty about non-private firms is resolved faster due to investors' higher exceptions about private firms' future performance.