Recently, the research paper "The China-U.S. Equity Valuation Gap," co-authored by Zhang Xiaoyan (Senior Associate Dean and Chair Professor of Finance at the PBC School of Finance, Tsinghua University) and her collaborators, was officially accepted for publication by The Review of Financial Studies (RFS), a premier international academic journal in finance.
The Review of Financial Studies is widely recognized as one of the most prestigious scholarly journals in the field of finance. Together with The Journal of Finance and the Journal of Financial Economics, it constitutes the acclaimed "Top 3" journals in finance, representing the highest level of academic excellence in the discipline.
Research Overview
Stock market valuation is a core issue of persistent focus for regulators, investors, and listed companies alike. For regulatory authorities, a rational valuation environment is fundamental to the capital market’s capacity to allocate resources effectively—channeling funds into resilient, high-efficiency enterprises and fostering the high-quality development of the real economy. For investors, equity valuation directly steers asset allocation and investment decisions, serving as a primary benchmark for corporate intrinsic value. For publicly listed firms, valuation is intrinsically tied to shareholder wealth and the cost of capital, playing a pivotal role in determining IPO timing and listing venues, as well as in crafting long-term corporate strategies.
Despite its importance, the academic literature has long lacked a systematic empirical explanation for the valuation levels of the Chinese and U.S. equity markets and their dynamic evolution. Between 1995 and 2022, the overall price-to-earnings (P/E) ratio of the U.S. stock market remained relatively stable, hovering around 20. In contrast, from 1995 to 2009, the average P/E ratio of the Chinese A-share market significantly exceeded those of the U.S. and other emerging markets (by approximately 11 and 20 multiples, respectively), exhibiting a pronounced "valuation premium." After 2009, Chinese A-share valuations underwent a substantial realignment, gradually converging toward the levels of other emerging markets and developed economies. Until now, the systemic drivers behind this structural shift had remained insufficiently explained.
This paper provides pioneering empirical research addressing this critical question. The authors find that the transformation of China’s equity valuation is not driven by differences in industry composition between Chinese and U.S. listed firms; rather, it primarily stems from systematic valuation adjustments within identical sectors. This indicates that the shift in China's equity valuation regime was propelled by systemic market-wide pricing forces rather than sectoral composition effects.
To uncover the underlying drivers of this valuation gap, the paper adopts the classic Gordon Growth Model, categorizing valuation determinants into two core dimensions: expected growth rates and discount rates. On the one hand, expected growth is positively associated with stock valuation. Compared to China's double-digit GDP growth era before 2009, the economy has entered a more moderate and steady development phase; slowing growth expectations may lower market projections for future corporate earnings, thereby exerting downward pressure on Chinese valuations and narrowing the gap with the U.S. market. On the other hand, discount rates and their underlying factors are equally vital determinants of equity valuation. Dimensions including financial openness, domestic investor structure, financial market development, and market liquidity can directly alter the required risk premia and capital costs, ultimately reshaping aggregate market valuations.
Using multivariate panel regressions and model-selection algorithms, the study demonstrates that traditional growth expectation differentials alone cannot account for the China-U.S. valuation gap and its structural shift. Instead, the discount rate channel serves as the central explanatory mechanism, with financial openness and domestic ownership structure playing pivotal roles:
Financial Openness: Broadening cross-border market accessibility enhances the market's information environment and boosts pricing efficiency. As China progressively deepened capital market opening, listed firms faced more rigorous external scrutiny, analyst coverage broadened, and forecast dispersion narrowed. This enhanced market-wide pricing efficiency, facilitating the transition from a localized valuation equilibrium—previously inflated by retail speculative trading and limited domestic investment avenues—toward global valuation benchmarks.
Domestic Ownership Structure: Concurrently, market-oriented institutional reforms (such as the Split-Share Structure Reform) and the expansion of institutional investors have profoundly improved corporate governance and valuation stability, directing capital toward more efficient uses.
Together, these institutional and market-structure transformations drove the deep-seated restructuring of China’s equity valuation framework.
This research not only enriches the academic understanding of valuation dynamics in Chinese capital markets, but also provides essential theoretical underpinnings and policy references for advancing high-standard institutional opening, improving information disclosure standards, and cultivating a robust base of professional institutional investors.
About the Authors
Zhang Xiaoyan is Senior Associate Dean and Chair Professor of Finance (National High-Level Overseas Talent) at the PBC School of Finance, Tsinghua University She is also a member of the Academic Committee of the People’s Bank of China and a Senior Fellow of the Asian Bureau of Finance and Economic Research (ABFER). Her primary research areas include the Chinese capital market, Fintech, empirical asset pricing, and international finance.
Professor Zhang's research has been widely published in premier international finance journals, including the Journal of Finance, Journal of Financial Economics, and the Review of Financial Studies, and has garnered multiple Best Paper awards. She currently serves as an Associate Editor for Management Science and the Journal of Financial and Quantitative Analysis, and as a Co-Editor for the Journal of Banking and Finance. She has received numerous teaching excellence awards from Cornell University, Purdue University, and Tsinghua University, and was named one of the "Global Top 40 Under 40" business school professors. In addition, she has led multiple major and special projects funded by the National Natural Science Foundation of China (NSFC) as well as key research tasks for the National High-End Think Tank.
Wang Xue is an Assistant Professor of Finance at the Dishui Lake Advanced Finance Institute, Shanghai University of Finance and Economics (SUFE-DAFI).
Ke Shuojia received his Ph.D. in Applied Economics from the PBC School of Finance, Tsinghua University (Class of 2021).
Geert Bekaert is a Professor of Finance and Economics at Columbia Business School.
