| In recent years, China’s stock market continued to fall, it differs immensely to the rising macroeconomic trends in our country. The reason for this phenomenon is that investor confidence suffered setback seriously.In early2008, China’s stock market went into a period of adjustment after rising sharply in the two years. Being impacted by the U.S. subprime mortgage crisis, the Shanghai and Shenzhen stock markets appeared sharp shock, the Shanghai Composite Index fell to1600points from6100points, the vast majority of investors are losing money, investor confidence suffered a serious setback.The study found that changes in investor confidence will not only have a impact on the return in the overall market and investment situation, but also affect the company’s financial and strategic decisions. This object of this paper is to examine the relationship among earnings quality, investors confidence and stock returns.Investor sentiment is becoming a hot topic of behavioral finance. Because investor sentiment can have an important impact on the stock market and the company’s financial decisions, more and more listed companies’ operators pay attention to investor sentiment, which plays an important role in the company’s operating decisions. Scholars verified the impact of investor sentiment to stock price from both theoretical and empirical parts. While investor confidence is part of investor sentiment. In the field of accounting, earnings quality has gradually become a indicator to measure both corporate performance and operating results. However, earnings quality research is more to explore its relationship with corporate governance, corporate values and results from the view of company point, lacking of the view of investors. With a new perspective on Earnings quality is undoubtedly with great theoretical and practical significance. This paper studies the relationship between earnings quality, investor confidence and stock returns, the conclusions has great theoretical and practical significance to that listed companies, investment organizations, accounting firms, vast investors and the capital markets understand the important role that earnings quality plays in maintaining and boosting investor confidence from the perspective of understanding and boost earnings quality in maintaining investor confidence, improving our earnings management system and increasing the securities market supervision, standardizing the market order, improving the investment environment, promoting financial reform, improving quality of investors and improving the market information disclosure system, thereby reducing and preventing limited rational behavior of investors.This paper regards our country listed company of the SME board from year2008to2011in the Shenzhen Stock Exchange as samples, based on theoretical analysis on three areas of earnings quality, investor confidence and stock returns, first study the impact of the quality of earnings to investor confidence, then study the impact of investor confidence to stock returns, and finally further research relationships between earnings quality, investor confidence and stock returns, so as to put forward constructive opinions to how to improve the quality of earnings of listed companies, standardize market order and reduce the irrational behavior of the market. This paper is divided into five parts, while eight chapters, Specific structural framework are as follows:The first chapter, Introduction. This chapter is a programmatic section of this paper, containing three aspects mainly. This chapter first describes the background and significance of the topic, and then introduces the research content, framework and research methods, finally explain the major contributions of this paper.The second chapter, literature review. This chapter sort out and summarize the literature by some scholars, and give related commentary, to explore the blank research field. Lots of scholars research related issues about investors confidence, literatures related to our topic are seldom. Therefore, This chapter summarize the relevant literature from domestic and overseas, around two aspects about earnings quality and investor sentiment, investor sentiment and stock returns. last, we review relevant studies based on summary.The third chapter, the theoretical analysis. This chapter provides a theoretical support for the empirical study of the future. Firstly making concept definition about earnings quality, investor confidence and stock returns, then we analyze the relationship between earnings quality in theory, through using bounded rational human assumption and concept of accounting information; then we use the emotional generalization theory to analyze the relationship between investor confidence and stock returns; Finally, based on the overreaction theory, we analyze the relationship between earnings Quality, investor confidence and stock returns the three.Chapter IV, Chapter V, Chapter VI and Chapter VII are the empirical research part of this paper. Firstly Chapter IV make a special introduction about how to build investor confidence index which is the main variable of this paper study. This article references the latest results to make a strict demonstration about these single indicators, and ultimately select earnings, finally choose three proxy variables which are price earning ratio, book value ratio and turnover to make component analysis, constructing a composite index of measuring investor confidence. Secondly Chapter V, Chapter VI and Chapter VII are the study design and empirical analysis. It mainly describe about the setting up of main variables, the sample selecting, data resource, and model building, and conducted a multivariate regression, giving empirical results analysis. This paper use the modified Jones model to measure earnings quality, and use annual rate of excess return after market adjusting to measure stock returns.Based on the theoretical analysis, this part has put forward three hypotheses:Hypothesis1:With other conditions unchanged, the higher the quality of earnings, the stronger the confidence of outside investors.Hypothesis2:With other conditions unchanged, the stronger the confidence of external investor, the higher current stock returns.Hypothesis3:With other conditions unchanged, in companies with high earnings quality, a positive correlation between external investor confidence and stock returns is enhanced.After that, the paper examined empirical studies for three hypotheses aiming at the relationship between earnings quality, investor confidence and stock returns, while make a descriptive statistics and regression analysis about the sample data, and make a brief description, correlation analysis, interpretation and analysis about the results, drawing a conclusion consistent with the assumptions.In addition, this paper made robustness test for the three hypotheses. For the first hypothesis, the earnings quality is divided into positive and negative manipulation group, and made regression respectively. Besides, make regression considering the lagged effects of investor confidence, the empirical results found no substantial changes; For the second hypothesis, the third one, using intervals up Losers to replace the original way to measure stock returns, results still remain consistent with previous findings. This shows that the conclusion of this paper is reliable.Chapter VIII, conclusions, recommendations, and future research directions. This chapter made a summary of the main conclusions of the full text, the main conclusions are as follows:Firstly, the earnings quality of listed companies and their external investor confidence showed a significant positive correlation. This indicates that the degree of rationality and maturity of our country’s investors are gradually improve, investors begin to focus on information of financial report, especially earnings quality, high-quality earnings information can improve investor confidence. It performs specifically in that investors pay widely attention to corporate profitability, and investors enhance more confidence about those companies with high ROA, which means that with the constant improvement of China’s securities market, equity investments will flow to companies having high ability of value creation. When asset-liability ratio is at a safe range, it can enhance investor confidence. In addition, investors prefer to the small-cap stocks, in general, compared to large companies, small companies have greater potential, and is easier to attract investors.Secondly, the stronger the external investor confidence, the higher the company’s stock gains. This effect is specifically showed in that when investor confidence is high, companies with high rate of assets and liabilities, sufficient internal cash flow, and small size have excess income; when investor confidence is low, companies with low rate of assets and liabilities, insufficient internal cash flow, and large size have low excess earnings. This suggests that small-cap companies with high debt ratio, sufficient cash flow is easier to get high stock returns. Finally, in companies with high earnings quality companies, positive impact of external investor confidence on stock gains will be strengthened. This suggests that the influence path of stock returns is through investor confidence to conduct, high-quality earnings information improves investor confidence, thereby increase stock returns. Finally, this chapter put forward policy recommendations and research limitations, and finally discuss the main directions of future research about earnings quality, investor confidence and stock returns.The main contribution and innovation of this paper are:Firstly, earnings quality is a hot topic in academic research in recent years, most studies about earnings quality are based on "rational" assumptions, but in the real capital markets, there exist a large number of non-rational investors, what kind of relationship exist between earnings quality and irrational investors’ decision-making process is an emerging topic of earnings quality research field. This paper is written from the starting point of perspective of investor confidence enriches research results of influence factors of earnings quality. Secondly, this paper bring earnings quality, investor confidence and stock returns into a research framework for the first time, providing feasibility ideas for understanding deeply about the correlation between these three cases, and mining mechanism of action of the affecting factors of earnings quality. Thirdly, based on the results of empirical research, this paper presents constructive suggestions about how to improve the quality of listed companies and build a healthy capital market environment.Study limitations of this paper is:firstly, the paper is based on investors’ bounded rationality, and that manage board is rational, having no earnings manipulation. However, in fact, the manage board is not always rational, they are likely to cater to investors by earnings management. Therefore, future studies might consider irrational behavior of manage board, which may make the results different. Secondly, the investor confidence index that the paper selected is a micro-index of combining of accounting and finance, it is in a preliminary trial stage, there may be some drawbacks, its legitimacy is questionable. In addition, the study did not consider the impact of market environmental factors on how investor confidence generated. Thirdly, the paper use manipulating accrued profits separated by the modified Jones model to measure earnings quality, it mainly consider about the reliability of earnings quality, and it doesn’t consider sustainability predictability and other features of earnings quality.Fourthly, this article is just to study the market’s overall investor confidence, in the fact, investor confidence can be subdivided, there are different levels such as institutional investor confidence, individual investor confidence, minority shareholder investor confidence and large minority shareholder investors confidence. |
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