A Study On The Value Relativity Of Non - Recurring Profit And Loss

As a measure of management performance and earnings level, profit and loss data occupies the central position in the financial report. Profit and loss are divided into recurring items and non-recurring items. Different from recurring items, non-recurring items have special nature and is coincidental and easy-operation, so the phenomenon of the listed companies use non-recurring items for earnings manipulation occurs frequently. China Securities Regulatory Commission (CSRC) put forward non-recurring items for the first time in 1999 to this problem, and in the next ten years, CSRC attached great importance to non-recurring items and had revised the related disclosure regulation for four times. After the revise, the concept of non-recurring items is clearer, and the content and requirements are more specific. The reclassify of profit and loss information and the addition of non-recurring items are to curb earnings management behavior and improve the quality of accounting information as well as to guide the investors notice the differences between recurring items and non-recurring items on persistence and valuation, avoiding decision failure and profit loss to the greatest extent.Profit and loss information has value relevance in the capital market in China, which can affect stock prices through investors’ decision. But the agreement conclusion on the issue of non-recurring items’ value relevance has not reached in academia. This paper firstly reviews the domestic and foreign researches on non-recurring items and the related theoretical basis, and then defines the concept of non-recurring items and introduces the evolution of disclosure system, and put forward the research hypothesis according to the special situation of China on the basis of mechanism analysis of the value relevance of non-recurring items. Then a test model is built, and China’s Shanghai and Shenzhen A-share listed companies from 2001 to 2013 are taken as the sample, which is divided into two parts-from 2001 to 2007 and from 2008 to 2013-with entry point of the latest regulation revision in 2008. Statistical analysis software is used to get preliminary analysis result and further empirical research on the value relevance of non-recurring items in China.The statistical results show that there are large differences between the listed companies in non-recurring items per share (nonrEPS), and non-recurring items to profit contribution rate (NTPCR) of most companies is low while NTPCR of some company is unusually high. This article also takes statistical research on the sample byyear interval and by earning performance. The statistical results by year interval indicatethat recurring items is far higher than non-recurring items totally, and the share price,earning data, net asset, growth data and the proportion of positive NTPCR after 2008are higher than those before 2008 overall while the risk level is lower after 2008. Thestatistical results by earning performance states that the share price, earning data and netasset of profitable companies are higher than loss ones on the whole, and profitablecompanies have lower risk level and more growth opportunities. The change trend ofshare price seems consistent with coreEPS in profitable companies while it’s notconsistent with coreEPS in loss companies or nonrEPS in both kinds of companies. The empirical results indicate that recurring items has high value relevance, whichis far higher than that of non-recurring items. Investors are rational generally, and theycan price different profit and loss information respectively. With the constantimprovement of disclosure regulations, especially after the major revision in 2008, thevalue relevance of non-recurring items after 2008 is markedly lower than that before2008. The value relevance of recurring items is much higher than non-recurring items inprofitable companies, while both recurring items and non-recurring items have very lowvalue relevance in loss companies. Investors pay more attention to growth index, netassets and some other indicators in the stock pricing of loss companies. During both thetwo research period, non-recurring items affect the value relevance of recurring itemswhich descends when NTPCR rises. Moreover, the impact on the value relevance ofrecurring items of non-recurring income and non-recurring loss are different when theyhave quite NTPCR. Non-recurring loss brings more effects on the recurring items’valuerelevance than non-recurring income when NTPCR is low and medium, and theopposite happens when NTPCR is high. This conclusion is line with the phenomenonthat highly profitable companies tend to use non-recurring losses to smooth earningsand low-profit companies use non-recurring income to stop loss and keep listedqualifications. The paper proposes some policy suggestions on the formulation and supervision ofnon-recurring items direct at the problems found in research, aiming at restricting theearning manipulation of listed companies, improving the quality of accountinginformation and promoting the development of capital market in China.