Firm Performance and Stock Returns: An Empirical Study of the Top Performing Stocks Listed on Shanghai Stock Exchange‪.‬

ABSTRACT This study attempts to determine whether and to what extent stock prices in the Chinese stock market are driven by firms' operating performance. We use a sample that consists of the top 10% performers listed in the Shanghai Stock Exchange from 1996 to 2000 in terms of annual stock returns. We use several measures to proxy for the firms' operating performance. Simple and multiple regressions are performed to determine, at the firm level, whether and to what extent these variables are related to stock price changes and what portion of the stock price movements can be explained by these firm performance variables. Our results indicate that while firm performance measures had some explanatory power of the stock price changes in the first two years during our testing period, the operating performance measures' explanatory power of the stock price movements generally declined as the stock prices went up. Our results suggest that the significant stock price increases from 1998 to 2000 were not driven by firms' operating performance. Instead, they were driven by several non-performance factors.