The dryness of the title of the paper highlighted this week almost caused me to overlook it; and that would have been a mistake. It’s a bombshell.
It’s conclusion is a vindication of my current decision to avoid A-shares and a huge wake-up call to the increasingly large number of institutional investors now trying their hands in the Chinese domestic share markets.
Researchers from the University of Massey in New Zealand, Liping Zou and William R. Wilson, set out to test whether earnings announcements, quarterly since 2005, had an effect on stock prices. Why is this a critically important question?
If they do that’d be consistent with grown-up markets elsewhere in the world. Only a small handful of lawyers, auditors, company managers and etcetera should have access to this information before its release. Therefore when its at odds, good or bad, with expectations you’d expect market participants to register surprise by (at the margin) buying or selling the stock and its price moving. Right?
The researchers looked at stocks in the Shenzhen and Shanghai markets from 2005 to 2014 and interrogated their price movements immediately after results announcements; guess what? No effects. This means fundamental analysis, at least for now in A-share land, can be tossed out the window.
As the researchers so delicately put it “..the price of Chinese stocks may be driven by information not available to all market participants.” Oh dear. They go on “..earning announcements contain little information of value thus, demonstrating the Chinese markets are not informationally efficient, so investors cannot assume assets are always correctly priced..” Oh very dear.
Their parting shot concludes”Until Chinese markets become informationally efficient investors especially overseas investors are unable to invest with confidence in Chinese equities.” A-men!
We’d expect the situation to improve over time; but for now if you thought the A-share markets were rigged, unresponsive to fundamentals and bandit infested this research provides solid academic support for what (for me at least), until now, may have just been a hunch.
The paper in full can be accessed via this link How Important are Earnings Announcements in China?.
Happy Sunday.