This paper examines the earnings-return association over long return intervals. The research design is built upon one important accounting intuition： as earnings are aggregated over longer intervals, the effect of earnings measurement error and the time lag between earnings recognition and market reaction slowly dwindles. Therefore, over time, we should observe an improving association between （aggregate） earnings and stock return. In this study, we first replicate the results of Easton, Harris, and Ohlson （1992） for the same period of 1968-1986 and find very similar results under refined correlation metrics. Second, we expand coverage to test US data from 1962 to 2011 and find that their prediction holds for the past 50 years in the US market. Third, our post-1992 China and US data generate the same pattern of rising earnings-return correlation as the return interval expands, despite China＇s immature stock market. Further comparison indicates that the earnings-return correlation in China is lower than that i
Using accounting-based valuations, Frankel and Lee （1998） document a positive association between fundamental value-to-price ratio （V/P） and abnormal stock returns in subsequent periods. They attribute the V/P effect to the market＇s gradual adjustment of stock prices towards a fundamental value, and this is regarded as counter-evidence for market efficiency （i.e. mispricing）. This synopsis aims to examine whether the V/P effect also holds for Chinese companies.
China＇s stock market has gone through major structural changes since its inception in the early 1990s. In this survey article, we review the empirical literature published in 15 leading accounting and finance journals from 1998 to 2013 that documents these important structural changes. In analysing this literature, we focus on the ＇distinctiveness＇ of the Chinese stock market compared with developed stock markets （e.g. US） and the research opportunities generated by the China setting. Key themes include China＇s share issue privatisation （SIP） reforms, the political connections in privately owned companies, the characteristics of Chinese listed companies and their governance, the regulatory environment reforms in China, and the evolving role played by auditors and other information intermediaries.
We replicate Ball and Brown （1968） using current US and Chinese data. We demonstrate that the significant relation between annual earnings changes and annual stock returns documented in Ball and Brown （1968） extends and holds to recent US data over the period 1971-2011 and that stock prices continue to react with some delay to unexpected earnings. This association result is confirmed using Chinese data over the period 1995-2011. However, our analysis reveals a key difference in relative magnitudethe Chinese stock market responds much more strongly to good news, and much less strongly to bad news, than the US market. In addition, we examine alternative selections of samples and benchmark returns using Chinese data, Our results suggest that the smaller magnitude and drift of market reaction in China cannot be driven by pre-warnings of earnings, firms in ＂abnormal trading status＂, timing of earnings announcements, or alternative choices of benchmark returns, although the magnitude difference is greatly reduced
I. Introduction Research on auditor reputation and clients＇ financial reporting quality can be traced back to Teoh and Wong＇s （1993） study, which provides empirical evidence of Big 8 audit firms having higher financial reporting credibility than non-Big 8 audit firms in the US market. In their study, Du and Zhou （hereinafter, DZ） replicate Teoh and Wong （1993） using a longer and more recent sample period in the US （1983-2012）2 and China （1995-2012） to examine whether the positive association between Big N auditors and perceived audit quality （ERCs） still holds after a major regulatory intervention in early 2000 and to compare this association in the US and China.
There is a growing literature discussing the incentives of analysts to disseminate cash flow forecasts and the quality of these forecasts. Most studies support the ＇demand hypothesis＇ and suggest that cash flow forecasts contain information additional to that provided in earnings forecasts. In contrast, Givoly et al. （2009） show that cash flow forecasts are just a simple extrapolation of analysts＇ earnings forecasts. In response to this challenge, Call et al. （2013） point out that the regression tests in Givoly et al. （2009） are non-diagnostic due to the measurement problem contained in the US dataset. We suggest that Givoly et al. ＇s （2009） method can be well applied in China since Chinese data do not have the same measurement problem as that contained in US data. By replicating the studies of Givoly et al. （2009） and Call et al. （2013）, we find results consistent with Givoly et al. （2009） that analysts＇ cash flow forecasts appear to be naive extensions of their earnings forecasts in China.
Introduction Value investing refers to the buying or selling of stocks on the basis of a perceived gap between their current market price and their fundamental value - commonly defined as the present value of the expected future payoffs to shareholders. This style of investing is predicated upon two observations about publicly listed companies and their stock prices： （1） a share of stock is merely a fractional claim on the futures cash flows of an operating business, and that claim is the basis of its long-run value; （2） over shorter horizons, prices can deviate substantially from the long-run value of the stock. Value investors buy stocks that appear to be cheap relative to their intrinsic value and sell （even sell short） stocks that seem exoensive.
In the past 20 years, there have been considerable developments and changes in the audit industry in the US and China. Building on the seminal work of Teoh and Wong （1993）, this essay revisits the tests of the prediction that earnings reports audited by larger audit firms have higher earnings response coefficients （ERCs）. Specifically, we investigate whether the positive association between ERCs and perceived audit quality holds in either the US or China using long-term historical data. Empirical analysis based on US data from 1984 to 2012 shows that the ERCs of Big N clients are generally higher than those of non-Big N clients, but such differences have dissipated since 2002, the year the Sarbanes-Oxley Act （SOX） came into effect. However, we find weak evidence in China during 1995 to 2012 that Chinese investors value the credibility of large international auditors. The results also reveal that the relationship between Big N and ERCs is stronger in the US than in China. Overall, our results show that auditor
This paper compares Chinese （CH） and US forecasting setting. Next year＇s EPS depend on comparison gives rise to the following question： firms in an earnings per share （EPS） （i） current price and （ii） current EPS. A what will the two financial markets have in common and what will most likely be different？ The evidence presented suggests that on a very basic level, China does not differ from the US. For both economies, the data show that the right hand side of the equation can be conceptualised as a weighted average of the two variables when rescaled. This scaling procedure depends on the earnings rate in the capital markets. However, the weights differ： For CH firms, the second right hand side （RHS） variable, current EPS, is relatively more important than the first, price; this finding stands in contrast to the US, where the two RHS variables are of about equal importance. The paper also elaborates on a methodological subject： the conclusions are not available if one uses ordinary least squares （OLS）. It shows
Beaver （1968） examines the information content of annual earnings announcements by evaluating the changes in trading volume and return volatility. In this study, we first replicate Beaver （1968） for a comprehensive sample of US firms from 1995 to 2012 and then apply the same approach to a sample of Chinese firms in the same period. Similar to Beaver （1968）, we find that with the US data, there is abnormally high trading volume and return volatility during the earnings announcement week. With the Chinese data, we find that Chinese firms＇ earnings announcements are also accompanied by abnormal trading volume and abnormal return volatility. Furthermore, we find that there is more information leakage prior to the announcement dates and more prolonged post-announcement drift in trading volume and return volatility for Chinese firms.
This study examines the earnings-return relation in the Chinese and US stock markets. We first examine whether the value relevance of earnings in the US stock market for the period 1968 to 1986 in Easton and Harris （1991） holds for the period 1998 to 2011. We find that the value relevance of earnings levels decreased significantly in the 1998-2011 period. We then examine the earnings-return relation between the Chinese and US stock markets in the 1998-2011 period. We find that the explanatory power of earnings levels differs between these two markets. Specifically, in the US market, the earnings level variable has a lower relative explanatory power than the earnings change variable and the earnings level variable has very limited incremental explanatory power in the presence of the earnings change variable. However, in the Chinese market, earnings levels and earnings changes have similar relative and incremental explanatory power. The disparity in the relevance of earnings levels between the two markets may b
Tucker and Zarowin （2006） examine the impact of income smoothing on earnings informativeness, as proxied by the future earnings response coefficient （FERC）. In this paper, we replicate Tucker and Zarowin （2006） and compare the results between the US and China markets. Specifically, using a sample of US firms from 2003 to 2008, we first find results consistent with Tucker and Zarowin （2006） that income smoothing improves FERC. However, our analysis for the China market over the same sample period indicates that income smoothing has little impact on FERC. Within the China market, we further find that income smoothing does not affect FERC for state-owned enterprises （SOEs） but weakly affects FERC for non-state-owned enterprises （non-SOEs）. We argue that the market-level differences in information environment partly account for the differential impacts of income smoothing on FERC.
Cheng and Li （2013） investigate whether income smoothing improves earnings informativeness for Chinese firms by replicating the research design of Tucker and Zarowin （2006）. The results suggest that the relation still holds for a more recent sample of US firms but the relation is different for Chinese firms. These results are interesting, and the authors argue that the poorer information environment in China is a possible culprit for the different results. This discussion raises the issue of what role accruals play in Chinese accounting. I replicate the study by Dechow （1994） in the Chinese market and find evidence consistent with the prediction that earnings exhibit less short-term noise than cash flows and greater associations with stock prices as the performance benchmark. These findings are indicative of accruals playing a similar role for Chinese firms as for US firms but also draw attention to some unresolved questions and areas for future research.
China is the largest emerging market and attracts a great deal of attention from investors and researchers worldwide. The Fama-French three-factor model is the outcome of decades of research on US stock returns. To what extent the three factors explain the variation in Chinese stock returns is an intriguing question. This paper documents empirical evidence on this issue and identifies some pitfalls that arise in the application of the three-factor model to Chinese stock returns. We find that several special features in China affect the three factors considerably and also influence the explanatory power of the three-factor model.
This special issue of China Accounting and Finance Review comprises papers and related commentaries that were presented at the conference held in Hong Kong on 6-7 December 2013. The conference was organised to address a seemingly simple question： if one replicates well-known US studies by analysing Chinese data, how will the results differ？ There is of course every reason to expect some differences, but what will these be？ And can these be explained by institutional and other kinds of economic differences？ The readers of the papers will note, however, that the issues become more intricate.