The Relationship Between Business Life Cycle And Earnings Persistence

Along with the continuously deepening of China’s market-oriented reform,thesecurities market is moving in the direction of legalization and standardization,theimportance of earnings is increasing.So people pay more and more attention on thequality of earnings.As an important criteria for judging the quality of earningsearnings persistence become an important factor for stock investors to consider whileevaluating the value of stocks.Since Sloan(1996) found that operating cash flow ismore persistent than total accrual,research on earnings persistence gradually becomean important direction.This paper examines earnings persistence from the angle ofbusiness life cycle which will have certain theoretical and practical value onsubsequent research.I select808listed companies in2002-2005as the research object and chooseoperating income growth rate,capital expenditure rate and operating cash flow/averageassets as three indicators to classify business life cycle which includes growcompanies,mature companies and stagnant companies.Based on the prior relevantforeign studies I discuss whether different stages of business life cycle have differentearnings persistence.I also find that earnings persistence of operating cash flow ismore persistent than total accrual;after discomposing total accrual to discretionary andnon-discretionary accrual, I find the persistence of non-discretionary accrual is morepersistent than discretionary accrual;then I add proxy variables of business life cycleinto above-mentioned empirical model finding that regardless of whether total earningsor the component of earnings the earnings persistence of mature companies is thehighest,followed by grow companies,stagnant companies is the lowest.Therefore, our listed companies should increase inputs in the main business areato increase earnings persistence; strengthen innovation and promote enterprise’s rapidgrowth and prevent enterprise’s recession; company should establish a sustainabledevelopment company culture to provide the basic power source of the sustainabledevelopment.