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On the pricing of the persistence of earnings components in China

Author

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  • Wu, Xuan
  • Tian, Gaoliang
  • Li, Yueting
  • Zhou, Qing

Abstract

We examine the market pricing of the persistence of earnings components in the Chinese stock market. We find that the market on average misprices the persistence of total earnings. By decomposing total earnings into components, we find that while the market shows no evident mispricing of the persistence of the industry-wide earnings component, it does misprice the persistence of firm-specific earnings, in particular, firm-specific cash flows. Moreover, the mispricing of firm-specific earnings is more pronounced in the sample of firms with low firm-level disclosure quality. Our findings indicate that “investor fixation” is not a primary driver of the mispricing of the persistence of earnings components in China; instead, this mispricing is largely driven by the disclosure quality difference between earnings components.

Suggested Citation

  • Wu, Xuan & Tian, Gaoliang & Li, Yueting & Zhou, Qing, 2019. "On the pricing of the persistence of earnings components in China," Pacific-Basin Finance Journal, Elsevier, vol. 53(C), pages 112-132.
    • Handle: RePEc:eee:pacfin:v:53:y:2019:i:c:p:112-132
    DOI: 10.1016/j.pacfin.2018.10.017
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    3. Rong, Yuen & Tian, Cunzhi & Li, Lifang & Zheng, Xinwei, 2020. "Labor hiring and stock return: A model and new evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).

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    More about this item

    Keywords

    Earnings; Cash flows; Accruals; Mispricing; Disclosure quality;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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