A Research Of Functional Fixation On The Reaction To The Accounting Earnings

Zhao Yu Long (1999) found that there existed functional fixation phenomenon in the securities market in China in the study of Chinese industrial companies listed on China's stock market. But nearly a decade later, especially after the Government promoted the great idea that we must develop and foster institutional investors cosmically, the stock market has improved a lot. Institutional investors have gradually become the main investment in the securities market. Under this situation, how is the matter of functional fixation in Chinese stock market? In the following two types of companies: one type, in which institutional investors are its main shareholders among its actual current shareholders, the other type, in which individual investors are its main shareholders among its actual current shareholders, whether these two types of companies exist the function fixation phenomenon? Whether the issue of function fixation in the two kind companies mentioned above is different? This is what this article will study.The main purpose of this paper is to examine whether the stock price reaction to the earnings announcement for years in firms with almost the same paper earnings and different earning quality is different, using the two type companies as research objects respectively; to examine respectively whether the stock price of the two kind companies mentioned above is decided by distinguishing permanent and temporary earnings. To achieve the above purpose, utilizing the data in 2005-2006 of non-financial listed companies with only issuing A-share, I make my study from the following two dimensions: information approach, learning from Zhao Yu Long (1999); and valuation approach, learning from the pricing model from Ohlson (1995). The study concludes that: under the information approach, I find the companies, with individual investors as their main shareholders among the actual current shareholders, exist function fixation phenomenon; but I find no direct evidence to support the idea that the companies, with institutional investors as their main shareholders, do not exist function fixation phenomenon and I can just prove it indirectly. Under the valuation approach, I find that in the companies with institutional investors as their main shareholders, stock price is decided by distinguishing permanent and temporary earnings. The stock price of this kind of company is mainly decided by permanent earnings. The hypothesis that in the companies with individual investors as their main shareholders, investors price the stocks based on both permanent and temporary earnings, can only be tested in 2005. However, I find investors in both types of companies are "functionally fixated" on accounting earnings, rather than net assets per share and net cash flow per share generated from operating activities. In short, I suppose the function fixation phenomenon is weakening in the companies with institutional investors as their main shareholders while the function fixation problem is still serious in the companies with individual investors as their main shareholders.