Does the Market Listen to the Government? Evidence from China Central Television

• Author: Yun Hong,Yanhui Jiang
• Published date: 01 June 2020
• Date: 01 June 2020
• DOI: http://doi.org/10.1111/ajfs.12296

Does the Market Listen to the Government?

Evidence from China Central Television*

Yun Hong

Department of Accounting, Business School, Hunan University, China

Yanhui Jiang**

Department of Accounting, Business School, Hunan University, China

Received 18 January 2019; Revised in current form (2

nd

revision) 2 February 2020; Accepted 28 February

2020

Abstract

This study explores the asset-pricing function of CCTV (China Central Television) News in

China. Results show that the economic focus and economic tone of CCTV News positively pre-

dict future aggregate stock market returns. We also find that the CCTV News economic focus

betas and tone betas are positively related to cross-sectional excess returns. The influence mech-

anism tests indicate that institutional investors decipher and absorb information from CCTV

News faster and more effectively than retail investors. Finally, informed traders’ and analysts’

positive responses to CCTV News may partly explain the short-term stock market reaction.

Keywords CCTV News; Cross-section of stock returns; Influence mechanism; Out-of-sample

forecasting; Return predictability

JEL Classification: G11, C22, E60

1. Introduction

Extant literature documents that speeches made by managers, analysts (Brockman

et al., 2017a, 2017b), central banks (Rosa, 2011; Born et al., 2013), and political

leaders (Wisniewski and Moro, 2014) may shake stock market traders. However,

another critical economic participant, the central government, has been neglected in

the literature, despite its pivotal position in economics, especially in terms of an

emerging market with extensive government intervention (e.g., Fishman, 2001; Liu

*The project is financially supported by the China National Natural Science Foundation,

number 71602054; Hunan Province Natural Science Foundation of China, number

2017JJ3043. We thank Editor Xuan Tian and two anonymous referees for valuable comments

and suggestions. All errors are ours.

**Corresponding author: Department of Accounting, Business School, Hunan University,

Lushan Road (S), Yuelu District, Changsha 410082, China. Tel: +86-136-3740-0234, email:

huihui0733@hnu.edu.cn.

Asia-Pacific Journal of Financial Studies (2020) 49, 438–462 doi:10.1111/ajfs.12296

438 ©2020 Korean Securities Association

et al., 2017). This literature gap motivates us to explore the asset-pricing function

of the central government’s speech in a typical emerging market in China.

There are many advantages to utilizing Chinese stock market data in this study.

First, the Chinese stock market is the world’s largest emerging market; the Chinese

economy is the world’s second largest economy. Therefore, the performance and

stability of China’s capital market play an important role in the development of the

world economy (Nartea et al., 2017). Second, China has a typical government-dom-

inant economy system in which the government holds significant sway over the

economy and remains a critical source of resources and legitimacy (Naughton,

2006; Lin, 2011); this system significantly magnifies the government’s voice. Third,

China has the world’s largest and most elaborate propaganda system, which

increases the impact of the government’s speech and amplifies the scope of its influ-

ence (Shambaugh, 2007). Fourth, due to restrictions on capital flow and holdings,

the Chinese stock market is a segmented market with Chinese investors dominating

ownership of stocks. The market is different from integrated and developed mar-

kets, or even from other emerging markets that are partially integrated, thus provid-

ing a special setting to observe the government’s impact on a unique set of

investors (Nartea et al., 2017; Yao et al., 2019). Fifth, in terms of investor structure,

unlike in mature overseas capital markets with dominant institutional investors,

retail investors occupy a large proportion of the Chinese market. These investors

are presumably more prone to behavioral biases and may be more likely to be

affected by the government propaganda system (Cheema and Nartea, 2017). Finally,

the vast territory and significantly diverse markets and legal apparatus across

regions in China create a natural laboratory in which to study the cross-sectional

impact of the government’s speech (Fan et al., 2017).

We use CCTV News to proxy for the government’s speech because it is the

“throat and tongue” of the Chinese central government (Cody, 2007; Chang, 2016).

Textual analysis techniques are deployed to construct the variables that capture the

government’s priorities and tone on economic issues from the textual documents of

CCTV News. If CCTV News spends more time on economic issues or if the tone

on economic issues is optimistic, we conjecture that these are signals from the cen-

tral government, reflecting its determination to develop the economy or to show

optimism about future economic trends. The central government’s intention or sen-

timent contained in the speech will quickly transfer to the market and bring about

stock market fluctuations.

Using data from July 2014 to December 2018, we first find that the economic

focus and tone of CCTV News positively predict future stock market returns for

medium and short horizons. This positive relation remains significant even after

controlling for a number of predictive economic and market variables and conduct-

ing out-of-sample tests. Next, we investigate the role of CCTV News in the cross-

sectional pricing of individual stocks and equity portfolios. We estimate stock expo-

sure to CCTV News’ economic focus and tone indexes using the Fama-French fac-

tor model and show that stocks in the higher economic focus beta or eco nomic

Does the Market Listen to Government?

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