Studies On Earnings Persistence, Accruals And Cash Flows

Chinese reform and opening-up has carried out for nearly thirty years, in which Chinese firm management model has been changing to modern type, and especially in which Chinese accounting system has been evaluating and modernizing. In this period these are focused on in researching and practicing that Chinese security market building up and developing and accounting information of listed companies collecting and disclosing. Since Chinese security market was established in 1990, many excellent companies have get the fund to developing with listing process. By the Chinese security market developing, many problems in supervision and information disclosure have revealed, which need to be effectively solved with laws, regulations, and standards establishing and modifying by the supervision departments and accounting system. And the disclosure and quality of accounting information has been the focus on in research field. It bases on that accounting information has market value relevance, which will benefit for stakeholders, especially for outside investors. As a special type of firm, the listed company has inherited the firm basic characteristics, and the profit is one of its basic aims. While earnings of accounting information is one of the most important indexes to measure firm profitability, so earnings quality characteristics are the focus contents for listed company stakeholders. Earnings quality includes persistence, predictability and variability, and latter two are based on persistence.So the studies on earnings persistence provide the background researches for other various relevant positive studies deriving from earnings. If earnings persistence does not exist or its basic characteristics are not sure, the relevant studies will have design and conclusion errors. Because of the importance and deficiency of earnings persistence study, this paper chooses earnings persistence as the research thesis, carry out the study and finish composition. Based on analysis of relevant financial and market transaction data of the companies listing in Chinese A Shares security market, this paper studies on earnings persistence, persistence of components of earnings, effects of these components on earnings persistence, and tests of market value relevance. The study designs and results will provide the background research supports for other relevant earnings studies.To make a clear study process, this paper mainly considers the following factors:Earnings persistence characteristics. Based on earnings self, this part designs different alternative models to test the existence of earnings persistence, to test the characteristics that earnings persistence has owned, such as timely character, to test market value relevance of earnings persistence, namely the relation between the different earnings persistence characteristics and market return. This part study aims at a focus research object, uses different samples filtered and handled by various methods, designs relevant study models, and carries out the tests and verifications on the existence of earnings persistence and the relevant characteristics.The persistence characteristics of earnings components. Earnings has two basic components, accruals and cash flow. Accruals is calculated by accrual base. As non-cash earnings component that firm earns in the current period, accruals shows as the future cash collect demand deferred from the current earnings. Because accruals is measured but does not realize in the current period, actual operating managers use accruals as a convenient tool to adjust earnings, on which the studies on earnings management almost start. While cash flow is the part of actual earnings collection in the current period, embodies the ability of cash collection, and keeps steady relation with actual operating results. Because of the inconsistence of the two components characteristics, these two components have different persistence, and the different component persistence affects earnings persistence. So the studies on the persistence of accruals and cash flow have very important research value.The effects of accruals and cash flow on earnings persistence. As earnings components, accruals and cash flow will affect earnings persistence, mainly including the different effect degree and effect ways of these two components.The inter-effect between accruals and cash flow. In the same period there is a reversing relation between accruals and cash flow. And according to different periods, there exists interdependence between accruals and cash flow. Since the different persistence and the inter-effect of the two components, there must be the inter-estimating and inter-interpreting relations between accruals and cash flow. The studies on the inter-effect between accruals and cash flow can help understanding the characteristics of the earnings disclosure, accruals and cash flow of companies listed in Chinese security market.The value relevance researches on earnings, accruals and cash flow in Chinese security market. As an emerging market, Chinese security market has many imperfectly developing areas. Partly because the relevant supervising system need to be adjusted and improved, and partly because investment idea, investment skill, and investment risk bearing of the investors need to be evaluated and promoted. Thus there need clear and actual answers to how mature and efficient Chinese security market, and how to promote the investment value and return of the investors by using the useful information, which provide research bases for other relevant studies.According to these main research contents, the creative points include:Research content creation. The prior researches on the simple relation between earnings, accruals and cash flow did not deeply study on the existence of these themes persistence and characteristics, and did not deeply study on the inter-effect of their characteristics. One of the creative points of this paper is that study on these research contents and get sciential research results by designing efficient research process and research methods.Research model creation. This paper firstly tests the classic research models, then combining the concrete characteristics of different models and research aims this paper develops more efficient research models. It testifies research results effect and scientific, manager reactions of listed companies, and market efficiency and investor action using alternative models.Research index creation. This paper uses different indexes and index calculating methods to finish the studies to avoid the research errors using simple research index, which ensure that the research results are scientific and efficient.Research sample creation. This paper uses time series sample, panel sample, and pooled sample to complete the studies to make consistent with models and samples and to make sure that the research results are reliable.This paper testifies that earnings persistence objectively exists and that there are different effects of accruals and cash flow to earnings persistence by two section empirical researches. The main research results and conclusions are the following:The main research results and conclusions from the researches testing earnings persistence existence.Earnings has high persistence of Chinese listed companies. The same as the foreign capital market research results, earnings of the different periods has strongly relevance, and keeps steady relation, which proof it common phenomenon that earnings has persistence. This common earnings persistence relies on the demand of the company operating management, and the demand of the investment return of the outside investors.More listing duration of companies, more earnings persistence. The result comes from more steady operating performance and more focus pressure of investors. Under these two pressures, earnings persistence is improved and it leads to more return for various stakeholders.There are different characteristics of earnings persistence value relevance using different research windows. In the short-term windows, there exist the excessive expectations before the annual report announcement and negative adjustment after the annual report announcement. These show that Chinese security market has lower efficiency, and that near the annual report announcement there are many venture investors who want to get arbitrage return in Chinese security market. While in the long-term windows, higher earnings persistence give investors higher return, which become the focuses for the long-term investment policy.The main research results and conclusions from the researches testing the effects of accruals and cash flow to earnings persistence existence.There objectively exist accruals persistence and cash flow persistence. The accruals persistence shows the reversion character, which derives from cycle change character of routine operating, and from earnings management that insider operating managers use accruals to manipulate different period earnings, such as income smoothing. And cash flow persistence displays positive reinforcement character, which is as a result that the earning cash ability of Chinese listed companies is strengthening, and as a result that it is seldom using cash flow to manipulate earnings. According to accruals, cash flow more accurately reflects the firm actual performance.There are significant effects of accruals and cash flow to earnings persistence. There are steady relation between earnings, accruals and cash flow. And the effects are not accordant with accruals and cash flow to earnings persistence. The effects appear the U-shape or inverse U-shape of earnings persistence, cash flow persistence and accruals persistence with firm profitability change.The research results and conclusions of earnings persistence value relevance. Referring Sloan (1996), this paper uses Mishkin rational expectation model to further research relevant persistence and as substitute model to test market reactions and market efficiency. According to the widespread short-term venture action resulting from the prior research section, this section uses two different buy-hold investment decision abnormal returns calculated in short-term research windows. Generally, before the annual report announcement the market efficiency is at lower condition not only according to earnings self but also according to effects of accruals and cash flow to earnings persistence. After the annual report announcement market efficiency shows higher because that rational adjustment offset the shortage of market efficiency. In the divisive sub-market of different investment portfolios by ranking profitability, the market efficiency are not same. The market efficiency of extreme profitability sub-market is lower. And in different sub-market, the effects of accruals and cash flow to earnings are not consistent. So the prior whole market efficiency research need to further develop.This paper testifies accounting earnings persistence objective existence and the different effects of earnings components to earnings persistence, which provides the background support to relevant earnings researches. Thinking of this paper researches' shortages and limitations, there are many further and future research in various factors with earnings persistence, such as year difference, various market value relevant indexes and research models, district difference, size effect, capital structure, agency problem, government problem, industry characteristic, growth, capital cost, and so on, and use earnings persistence as a factor to carry out other research.