Financial information relevance with stock return and return disparity study: case for China A-H dual-listed companies

Abstract: The relationship between stock return and company financials information as a key component of investment decision making has its highly practical implications for equity market investors. This paper narrows down the scope to examine how this relationship looks like for dual-listing companies in China s developing capital market, more specifically between return or return disparity and two price ratios, earnings to price and book value to price ratio. A series of fixed-effect models are applied on a panel data set of A and H dual-listing companies to test three main hypotheses developed on this issue. It was found that price ratios BV/P explain A and H current share returns with a negative responding effect, trailing E/P ratios cannot always explain the current period return especially under normal market conditions but forward E/P are more useful. Return positively responds to E/P ratios when significant relationship holds. A shares generally demonstrate higher value-relevance with price ratios than H shares do, and the relevance sensitivities with price ratios are higher too. BV/P ratio (both trailing and forward) is useful in return prediction and more so for A shares than H shares. AH share return disparity can be predicted from the gap between A and H share BV/P ratios, the wider the gap the bigger the disparity will be. Generally speaking, A (H) return or AH return disparity predictability is undermined during period with strong market disturbance like financial crisis, indicating the limitations of such predictability.