Size and price-to-book effects: Evidence from the Chinese stock markets

•We examine the size and price-to-book effects in Chinese markets.•In contrast to U.S., the size effect is stronger during the restrictive monetary regimes.•We attribute this result to specific characteristics of Chinese markets.•We use herding and monetary policy as information variables in the conditional asset pricing model.•Herding and monetary policy have significant effect on the conditional betas associated with MRP, SMB, HML and MOM factors.

We examine the size and price-to-book effects in Chinese markets. We find strong evidence for the size effect but little evidence for the price-to-book effect. We further examine these effects in the context of the monetary policy of the People's Bank of China. We find that the size effect is stronger during the time of restrictive monetary policy. We attribute these results to specific characteristics of Chinese markets, such as potentially lower bankruptcy costs of partially state-owned enterprises.We also examine the herding behavior and find significant effects between 2002 and 2012. Herding behavior decreases after 2006 suggesting that the information asymmetries in Chinese markets are decreasing as the markets mature. Herding is also a significant information variable in a four-factor conditional pricing model.