| Abstract | In a fast growing economy with severe financial repression, high corporate investments may be highly valued by stock market. But the relative importance of expected investments in determining firms’ stock valuation is rarely discussed in previous studies. We extend the variance decomposition framework proposed by Cochrane (1992) and Cohen et al. (2003) to include the effect of investments on stock prices. We find that (1) the variation in expected investments play an important role in determining stock valuation in China’s A-share market, especially in small stocks and highly priced stocks; (2) the price informativeness of China’s A-share market has changed significantly in the last two decades. Before 2005, most cross-sectional variance of market-to-asset ratios can be explained by variation in expected stock returns, which may be induced by mispricing. But after 2005, the variance of market-to-asset ratios is mostly correlated to future profitability. As comparison, in the NASDAQ market, which also include lots of high-growth firms, variance in expected investments also cause a large fraction of cross-sectional dispersion of stock valuation, which is similar to the Chinese case. This evidence supports that in a high-growth market, expected investments are more important for stock valuation. |