Decomposition of book-to-market and the cross-section of returns for Chinese shares

• This paper applies the book-to-market decomposition methodology to Chinese shares.
• The paper extends the model of Fama and French (Journal of Finance, 2008).
• The paper examines both Class A and Class B Chinese shares.
• The paper examines stocks listed in the Shanghai and Shenzhen exchanges.

In this paper, we show that the book-to-market decomposition described in Fama–French (2008) significantly improves the predictive power of the estimation for an important emerging market, viz, Chinese shares. Second, we show that this improvement comes mainly from the change in book equity and not from the change in price. The predictive power of the change in book equity is most pronounced for large stocks, for stocks listed on Shenzhen Exchange, for stocks with low book-to-market (or growth stocks), and for Class B shares. Net Share Issue and Momentum add no explanatory power to the predictive regressions.