Price limits and the value premium in the Taiwan stock market

By proposing a measure of limit-hit frequency, this paper provides the first investigation to understand whether and how price limits are related to the cross-section of stock returns. Based on a sample of listed stocks in Taiwan, we show that the value premium is stronger among stocks with lower limit-hit frequency. This evidence is consistent with the prediction of the limited-attention explanation and rejects the limits-to-arbitrage hypothesis for the value premium in Taiwan. Further analyses indicate that the association between limit-hit frequency and the value premium is robust to several alternative explanations.