Theoretical Exploration and Policy Implications of the Valuation Framework in China's A-Share Stock Market

The construction of a valuation system with Chinese characteristics is a crucial step towards enhancing the adaptability and pivotal role of the capital market and supporting the high-quality development of China's economy.This paper systematically addresses three key questions regarding the construction of the valuation system with Chinese characteristics.Firstly,which pricing factor is important for the Chinese valuation system? Secondly,has this factor been incorporated into the current market valuation models? Thirdly,if not,how can it be included in the valuation system? We propose that the valuation system with Chinese characteristics should consider the total social value created by firms,rather than solely focusing on the net present value of profits for shareholders.The measure of a firm's total social value should encompass two aspects:①stakeholder value,including the benefits to employees,suppliers,customers,debt holders,and governments; ②the multiplier effect that a firm generates for the overall economy through its production network.This measure not only reflects an orientation towards improving people's welfare but also fully embodies the prominent features of the importance of the node industry in China's economic growth model. We empirically examine whether the total social value has been priced using China's A-share sample stocks from 2003 to 2021.The results indicate that firms with high social value demonstrate superior fundamental performance.The portfolio of high social value stocks can generate excess stock returns that cannot be explained by existing pricing factors.Investors are more likely to underestimate the earning performance of firms with strong social value.These findings suggest a mispricing and undervaluation of the social value factor in China's current capital market valuation system. The reconstruction of the valuation system with Chinese characteristics is an ongoing and lengthy process.It requires simultaneous efforts from the investment side and the corporate side to mutually cultivate capital and assets that recognize social value.Our policy recommendations include:Firstly,standardizing and strengthening the disclosure of information related to corporate social value.Secondly,enhancing investor education and leveraging the role of professional institutional investors to focus more on information related to social value.Thirdly,from the investment side,cultivating long-term capital for social value,such as insurance,pensions,social security,and annuities,and developing broad-based index products.Fourthly,encouraging Chinese enterprises to proactively strengthen their strategic and operational management capabilities in creating social value.Lastly,strengthening systematic research on the valuation system of Chinese characteristics.