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Do Investors See Through Accounting Profitability and Recognize Efficiency? Evidence from Chinese Listed Companies

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  • Wenjuan Xie

    (University of New Hampshire, USA)

Abstract

This paper studies the accounting performance measure, profit efficiency and investor valuation of 1,262 Chinese firms listed in Shanghai and Shenzhen Stock Exchanges from 2001 to 2010. Profit efficiency is defined as the ratio of actual profit realized to the optimal profit described by stochastic frontier approach. An estimation of robust ordinary least square model for accounting performance measures (ROA) controlling for industry effect results in negative skewness of the residuals, indicating the existence of profit inefficiency. A year-by-year cross-section stochastic frontier analysis documents a declining pattern of accounting performance and a contrastive increasing tendency of profit efficiency. Linking the market valuation ratios to profit efficiency illustrates a significant empirical relationship that Chinese investors reward firms of higher efficiency with higher market valuation. The over-time improvement of efficiency is also associated with increased market valuation.

Suggested Citation

  • Wenjuan Xie, 2013. "Do Investors See Through Accounting Profitability and Recognize Efficiency? Evidence from Chinese Listed Companies," Multinational Finance Journal, Multinational Finance Journal, vol. 17(3-4), pages 243-293, September.
    • Handle: RePEc:mfj:journl:v:17:y:2013:i:3-4:p:243-293
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    More about this item

    Keywords

    market valuation; profitability; efficiency; stochastic frontier; chinese listed firms;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management
    • M16 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - International Business Administration
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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