Fundamental Analysis in China: An Empirical Study of the Relationship between Financial Ratios and Stock Prices

TL;DR

This study evaluates the predictive power of fundamental analysis in China’s transitional economy, showing that financial ratios can effectively forecast stock prices and reveal economic realities across industries.

Contribution

It provides empirical evidence that fundamental analysis remains valuable in China’s transitional economic context, contrasting with the efficient market hypothesis.

Findings

Fundamental analysis can predict stock prices in China.

Financial reports reflect economic realities within industries.

Information synchronization between accounting data and stock prices is imperfect.

Abstract

The informational context is regularly questioned in a transitional economic regime like the one implemented in China or Vietnam. This article investigates this issue and the predictive power of fundamental analysis in such context and more precisely in a Chinese context with an analysis of 3 different industries (media, power, and steel). Through 3 different kinds of correlation, we examine 25 financial determinants for 60 Chinese listed companies between 2011 and 2015. Our results show that fundamental analysis can effectively be used as an investment tool in transitional economic context. Contrasting with the EMH for which the accounting information is instantaneously integrated into the financial information (stock prices), our study suggests that these two levels of information are not synchronized in China opening therefore a door for a fundamental analysis based prediction. Furthermore, our results also indicate that accounting information illustrates quite well the economic reality since financial reports in each industry can disclose a part of stock value information in line with the economic situation of the industry under consideration.