Conservatism and silence: The clan premium

This paper investigates the asset pricing implications of clan culture, the root culture of China. We construct a long–short portfolio based on firms with high versus low clan strength and uncover a significant positive return spread. This clan premium remains robust after controlling for standard risk factors and firm characteristics, and is resilient to endogeneity and sensitivity checks. Further analysis suggests that such premium cannot be attributed to systematic risk, but is more consistent with a mispricing-based explanation rooted in behavioral preferences of clan-affiliated firms. Specifically, the persistent conservatism in corporate decisions conveys unjustifiably pessimistic signals to investors, leading to persistent undervaluation; clan-affiliated firms' limited disclosure incentives create an environment of informational opacity, impeding investors' timely recognition of positive information. In addition, we verify that clan-affiliated firms exhibit strong economic performance, thereby ruling out the possibility that the observed conservative behavior and low disclosure are driven by weak fundamentals.