Salience Theory and Stock Return

Based on the asset pricing model of the salience theory, this paper selects the stock data of China’s A-share market from 2007 to 2021, uses the stock return to construct the salience theoretical indicator—ST, and tests whether the ST has the ability to predict stock returns in cross-section. The results of portfolio analysis and Fama-MacBeth regression analysis show that the ST has a significant ability to predict returns in cross-section, and the ST is significantly negatively correlated with the future earnings of stocks, this result remains significant after controlling for firm size, book-to-market ratio, market risk and a series of factors. From a further analysis, there is a significant salience effect in China’s A-share main board market, while the salience effect in the GEM market during the same period is not significant. This difference is derived from diverse investor structure, and the salience effect is less significant along with the upward trend in the proportion of institutional owners and the alleviation of arbitrage restrictions. This study is of great significance in enriching the application of salience theory in the Chinese capital market and guiding investors to establish correct investment concepts.