The Impact of Investor Heterogeneous Beliefs on Stock Returns in China ‘s A-Share Market

Abstract

Traditional asset pricing theory, grounded in strict assumptions of homogeneous investor beliefs and market efficiency, struggles to adequately explain the widespread irrational price fluctuations observed in China’s stock market. With the development of behavioral finance, heterogeneous beliefs—a key variable capturing differences in investor opinions—offer a new perspective for understanding market inefficiency. This analytical perspective aligns more closely with the structure of China's stock market, which is predominantly composed of retail investors. Using A-share market data from January 2007 to August 2025, this study selects adjusted turnover rate and idiosyncratic volatility as proxies for heterogeneous beliefs. Through portfolio analysis, Fama-MacBeth cross-sectional regression, and time-series regression, we systematically examine the impact of investors' heterogeneous beliefs on stock returns.The findings reveal that: (1) Heterogeneous beliefs significantly and negatively predict future stock returns, supporting Miller's (1977) theory of overvaluation under short-sale constraints; (2) This effect is stronger during bear markets and weaker in bull markets; (3) Over time, with improvements in market institutions, the pricing effect of heterogeneous beliefs shows a declining trend; (4) The impact of heterogeneous beliefs varies across market segments—most pronounced in the Main Board, followed by the ChiNext Board, and insignificant in the STAR Market. This research extends asset pricing theory from a behavioral finance perspective, examining its applicability within the practical context and investor structure of China's stock market. Based on the empirical findings, policy recommendations are proposed for regulatory bodies, and the study offers insights for investors to better understand cognitive biases and improve investment decision-making.