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

Accounting profit is the core indicator of all accounting information. It reflects the past performance of the company and can forecast its prospect combined with other indicators. Therefore, after the disclosure of the annual reports, investors usually evaluate the performance of different listed companies by accounting earnings and make investment decisions mainly based on it. Legislative and administrative institutions in the security market also use this indicator to evaluate and supervise listed companies. Besides, accounting earnings are closely related to the qualification of listed companies, determination of issue price, refinancing, special treatment of security transactions, listed suspension and delisting.As accounting profit has such an important position in the evaluation of the performance and profitability of listed companies, some of them have a strong motivation to manipulate the numbers. Hence, profit manipulation by listed companies continues to emerge in recent years, especially the phenomenon of increasing the profit level by investment income. The fact that the growth rate of gross profit ratio slows down and investment income ratio jumps makes the profit structure of listed companies deteriorate, and their continuous profitability is of public concern. In this situation, how to improve the earnings persistence of listed companies, educate investors to differentiate factors of different nature in the accounting earnings, prevent and remove the financial risk and promote the healthy development and the financial market has become an important topic of common concern.This paper makes an empirical study on the earnings persistence and stock price volatility of listed companies in our country. The paper is divided into six chapters:The first chapter introduces the significance of the topic and the research framework, and reviews the literature of relevant topics home and abroad. In recent years, listed companies in our country continue to elevate their performance by the increase of investment income. Due to the endogenous risk of the capital market, investment income is not stable, which brings huge uncertainty and volatility to the accounting profit. This volatility is enlarged by P/E ratio and reflected in the huge fluctuations of the stock prices, which increased the risk of the financial market. Therefore, the topic of this paper is of great realistic significance and its result will provide guidelines to different market participants.The second chapter explains the basic concepts in the paper, including accounting profit, gross profit, earnings persistence and earnings response coefficient.The third chapter collects the disclosed financial data of listed companies in our country from 1992 to 2006, and makes descriptive statistic analysis. The result shows that the average of gross profit ratio experienced huge fluctuations and has great industry difference. Generally speaking, investment income makes relatively great contribution to the overall profit, and the earnings quality of listed companies in our country should be enhanced.The fourth chapter is an empirical study on the impact that earnings persistence of listed companies on the stock price change. The sample ranges from year 1999 to 2006. The paper calculates the cumulative abnormal return and uses it to measure the market reactions to the accounting profit information with different earnings persistence. After the statistical tests, the result shows that the market couldn't differentiate earnings factors with different earnings persistence, which further indicates that investors couldn't identify the characteristics of earnings quality and the market is still not rational and effective.The fifth chapter is the extension of the fourth chapter and discusses the impact that earnings persistence of listed companies on the vulnerability of the financial market. The paper first explains the impact that the implementation of the new accounting rules has on the revaluation of the equity investment of listed companies. The new accounting rules require equity investment to be measured by its fair value and classify the change of the fair value into current gain and loss. This provision substantially enhances the volatility of investment income and further increases the stock price volatility. Afterwards, the paper designs the basic evaluation framework of the financial vulnerability of our country, collects relevant data and makes a comprehensive judgment to the sub-system of our financial market.Based on the above study, the paper makes proposals on enhancing the earnings persistence of listed companies and removing the financial risk of our financial market in the sixth chapter.