A Study Of ERC On The Stock Market

At present, with the rapid development of empirical research in accounting in China, there are also a lot of unsolved questions. In our country, the accounting scholars have paid much attention to the information content of accounting earnings. They use the'earnings response coefficient'(ERC) as one of their basic research tools without in-depth study. Although ERC has a very simple concept, the overseas accounting scholars have studied it for many years.This article focuses on the ERC itself by empirical research. First of all, we could test the earnings usefulness by this study; secondly, we could examine the change of the ERC associated with unexpected earnings in different degree.The part one of this paper contains the summary of existing studies, the significance and purpose of this research.In the summary, I introduce the concepts of ERC, unexpected earning and accumulative abnormal stock return at first. After defining them, I illustrate how Chinese accounting scholars measure these indexes in their papers. Then I expatiate on the use and study about ERC. The Chinese accounting scholars use linear models to estimate ERC, but the overseas accounting scholars have found that the nonlinear models of security price responses to unexpected earnings are better than the linear models. I found only one paper which study ERC in our country, they used nonlinear model to estimate ERC and found the same result. Perhaps, I need to spend more time to collect literatures, but I did not find the second empirical research about ERC. In the end of the summary, I present the complexity of the study of ERC.After the summary, I explain the significance and purpose of this paper.The part two shows the model I used in this paper, the standards I used to choose sample and the reasons about them. I use the linear model to estimate ERC. The reason I do not use nonlinear model is that I am not sure I can use nonlinear model masterly. But linear model can meet the purpose of this paper. The part three present the process of regression and results. We can receive some conclusions as follow:Firstly, the accounting earnings of the stock market have information content to the investors. But this phenomenon is not apparent when the unexpected earnings are great. We can conclude that the investors are more sensitive about'natural'unexpected earnings. Certainly, there are some objective difficulties to study the extreme unexpected earnings.Secondly, the investors are more sensitive about bad news, minus unexpected earnings could provide more information. When the unexpected earnings are plus, only the'little good news'could attract the investors and the ERC is great. Moreover, when the unexpected earnings are minus, the ERC is negatively associated with the absolute value of the unexpected earnings.Thirdly, although the linear model is not up to date, it can also bring us some useful conclusions.The part four enumerates some shortages of this paper. For example, the model in this paper is a linear model; I did not comprehend the overseas literatures systematically; I have to ignore some factors in this study; the stability of the conclusions of this paper; I did not use pooled data.