Assessing Multiple Hypotheses for Small Firm Effect in Chinese Stock Markets: Evidence from the 2007 Pre-Global Financial Crisis

Abstract

This study delves into the behavior of the small firm anomaly within China’s A-share markets, scrutinizing data from 1993 until the onset of the pre-2007 global financial crisis. Anchored in the backdrop of traditional Chinese culture, wherein substantial year-end bonuses are bestowed upon employees in honor of their diligent contributions. The culture bonus hypothesis is investigated alongside other alternative hypotheses hailing from prior research in Western contexts. The empirical findings show that the Chinese stock markets distinctly manifest a significant small firm effect exclusively during non-January months. Intriguingly, however, none of the culture bonus, tax-loss, risk mismeasurement, or different information hypotheses stand as convincing explanatory factors for the observed seasonal-size effect in the Chinese setting. Notably, this anomaly materializes in its full significance solely when the market oper ates within an economic expansion phase, a trend that resonates with the economic cycle hypothesis. In essence, this paper furnishes evidence underscor ing a potential connection between market conditions and the behavioral patterns of investors. This underscores the intricate interplay between macroeconomic dynamics and individual decision-making within the realm of investment.