The Effects Of Earning Quality On Firm Valuation In Chinese Capital Market

Earning quality can not only truly reflect the nature of a firm’s earning and its operating situation, but also influence the effect of accounting information and a firm’s investment value. Therefore, analyzing and judging the influence of earning quality on Chinese market and investors’decisions can benefit the healthy development of the Chinese capital market and guide the investors within.Based on existing studies, this paper tries to study and discuss the effects of earning quality on the valuation of listed firms in Chinese capital market and on the investment decisions of the investors within the market through the proxies of seven earning characteristics, earning management and also an aggregated proxy combining seven earning characteristics with earning management. And this is where this paper differs from others’.This study finds that, earning qualities of Chinese listed firms are lower and earning managements of them are frequent in a long run. Generally speaking, a lower earning quality can enhance the degree of a firm’s earning management, which leads to a higher valuation of the firm. And the results also suggest that investors in the Chinese capital market cannot recognize or distinguish a firm’s real earning quality and earning management clearly.effectively and comprehensively. Since investors within the market are considerably effected by their expectations towards the market and by superficial information of the listed firms, valuations through price per earning ratio (P/E) are substantially influenced.