TITLE:
Assessing Multiple Hypotheses for Small Firm Effect in Chinese Stock Markets: Evidence from the 2007 Pre-Global Financial Crisis
AUTHORS:
Chieh-Shuo Chen, Cheng-Yen Huang, Ling-Hsuan Cheng
KEYWORDS:
Small Firm Effect, Culture Bonus, Risk Mismeasurement, Economic Cycle, Chinese Stock Markets
JOURNAL NAME:
Modern Economy,
Vol.14 No.10,
October
7,
2023
ABSTRACT: This study delves into the behavior of the small firm anomaly within
China’s A-share markets, scrutinizing data
from 1993 until the onset of the pre-2007 global financial crisis. Anchored in
the backdrop of traditional Chinese culture, wherein substantial year-end
bonuses are bestowed upon employees in honor of their diligent contributions.
The culture bonus hypothesis is investigated alongside other alternative
hypotheses hailing from prior research in Western contexts. The empirical
findings show that the Chinese stock markets distinctly manifest a significant
small firm effect exclusively during non-January months. Intriguingly, however,
none of the culture bonus, tax-loss, risk mismeasurement, or different information hypotheses stand as
convincing explanatory factors for the observed seasonal-size effect in the
Chinese setting. Notably, this anomaly materializes in its full significance
solely when the market operates within an
economic expansion phase, a trend that resonates with the economic cycle
hypothesis. In essence, this paper furnishes evidence underscoring a potential connection between market
conditions and the behavioral patterns of investors. This underscores
the intricate interplay between macroeconomic dynamics and individual
decision-making within the realm of investment.