An Empirical Study On The Earnings Persistence Of Listed Companies In China

This article studies on the earnings persistence and accruals mispricing from the perspective of the institutional investors. There are currently lots of empirical evidences that cash flows persistence is larger than accruals persistence, but the market does not recognize the difference, so the market will overprice accruals. Institutional investors named as rational professional investors, which have more technology, knowledge and access to information, often referred to as informed traders. There is a lot of experience and empirical evidence suggests that institutional investors always play a role to stabilize the market. Given the advantages of the institutional investors, we expect that institutional investors can increase earnings persistence and accruals persistence, and accruals will be more accurately priced in firms that have higher institutional ownership. Currently, there are some empirical researches abroad examines the role of institutional investors in the accrual mispricing of the U.S. stock market. The empirical results show that in the U.S. stock market, institutional investors, as the securities market watchdog, should be able to reduce the accruals mispricing. There are a number of Literatures domestic examine the relationship between institutional investors ownership with stock and earnings quality. This paper attempts to explore the relationship between institutional investors'ownership with earnings persistence and mispricing of accruals in China, trying to find such evidence in China which is emerging capital market.In view of the advantages of institutional investors, the paper focuses on the relationship between institutional investors with earnings persistence and accruals mis-pricing, and then this paper proposed two hypothesis. First, many studies have shown that the institutional investors began to intervene in corporate governance, so that managers have less motive and opportunity to manipulate earnings, especially on the manipulation of accounting accruals. To a certain extent, it can improve the value relevance and Information content of earnings, thereby reduce the distortion of accounting accruals, and the distortion of the accounting accrual is a factor of earnings persistence, so the author believes that institutional investors may increase stake earnings persistence. Second, some studies have shown that existing institutional investors who with information superiority, always have the ability of channels of information and the advantage of analysis ability than individual investors,and then the institutional investors, as more mature and rational investor, should be able to have a clear understanding of the information on cash flow and accruals,and distinguish the difference between them, and then make the right pricing and investment decisions, so the author believes that a large number of institutional investors holding may diminish the extent of accrual mispricing. This paper divides the sample companies into two samples, one is HIO sample companies with high institutional investors' holdings, and the other one is LIO sample companies with low institutional investor's holdings. This paper draw the following two main conclusions through the Data Analysis of China A share market, one is that the company with higher institutional investors holdings have higher earnings persistence and accrual persistence than companies with lower institutional investors holdings. The other one is that institutional investors can make the right price on earnings persistence and accrual persistence, and can reduce the extent of accrual mispricing.