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Default risk, state ownership and the cross-section of stock returns: evidence from China

Author

Listed:
  • Lanlan Liu

    (Nanjing Audit University)

  • Dan Luo

    (University of Reading)

  • Liang Han

    (University of Reading
    Tianjin University of Finance and Accounting)

Abstract

We apply a structural model to estimate firm-level default risk in China and investigate the stock return predictability of default risk and the moderating effects of state ownership for the sample period from 2003 to 2015. We show unique evidence that in China, default risk is positively associated with expected stock returns and state ownership matters considerably to the return predictability of default risk. We find investors of state-owned enterprises are not compensated appropriately in China despite of their higher default risk exposure. Our empirical evidence supports the conjecture on shareholder advantages and suggests that a strong bargaining power of equity holders would have a negative impact on stock returns.

Suggested Citation

  • Lanlan Liu & Dan Luo & Liang Han, 2019. "Default risk, state ownership and the cross-section of stock returns: evidence from China," Review of Quantitative Finance and Accounting, Springer, vol. 53(4), pages 933-966, November.
    • Handle: RePEc:kap:rqfnac:v:53:y:2019:i:4:d:10.1007_s11156-018-0771-0
    DOI: 10.1007/s11156-018-0771-0
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    More about this item

    Keywords

    Chinese stock market; Default risk; Return predictability; State ownership;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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