Study Of Investment Return Based On Earning Persistence Of Listed Companies

Accounting earnings is a core indicator among all accounting information, and a basic business messages of listed companies which the investors care. It is used to judge the performance of companies and predict their future performance. Earnings persistence is an important characteristic of accounting earnings, it means that accounting earnings will maintain steady in a long period. When a firm with high earnings persistence, the firm’s earnings will change largely during a period; when a firm with low earnings persistence, the firm’s earnings will change little during a period. Investors can use earnings persistence to predict future earnings. Li gang, Xia Donglin (2007)’s research has confirmed that between2001and2004, listed companies with earnings growth for five consecutive years have more strong earnings persistence and the higher information content, compared with other companies in the same industry.Operating profit comes from the main business of the enterprise, and it is more difficult to be manipulated comparing with items below the line. In the study of earnings persistence, operating profit index has more reference value compared to net profit index. In this paper we choose listed companies with continued5years earning increase as the sample between2005and2011, in the a-share, and select the overall sample according to the operating profits’ increase. We find the companies with earnings and operating profit increased have high earnings persistence compared of the companies with earnings increased only. As the profit is equals to revenue minus cost, sustained growth in operating profit can be divided into increased revenue and lower costs. According to the theory of competitive strategy, revenue growth are caused of the expansion of business, it can be seen as the embodiment of the enterprise differentiation strategy. The cost reducing can be thought of the embodiment of the enterprise overall cost leadership. As differentiation strategy is difficult to imitation, the company with sustained revenue growth is considered easier to maintain earnings growth. So, this study found that among the companies with sustained operating profit, the companies with sustained revenue increase have better earnings persistence.In30years development of china capital market, defects and the insufficiency are hard to forbid. The market is lack of effectiveness.in our country, institutional investors have short history, and individual investors are lack of analysis ability, locking phenomenon is very common. Investors have difficulty to predict future performance and the capital market mispricing the company with different earnings persistence. By recognizing the companies with better earnings persistence, I built a return model to research market value relevance, and found that investors should invest on the companies with better earnings persistence to gain higher return.