Research On Information Uncertainty, Investors’ Recognition Risk And Earnings Momentum

As one of widespread financial visions existed in capital market, this phenomenon strongly challenges the efficient market hypothesis. The harsh assumption determines that the efficient market hypothesis has been unable to meet the changes of the real conditions, and therefore it is difficult to explain and predict the earnings momentum financial vision. Investors’ recognition risk theory thinks that investors gets the recognition risk of the company’s information identification on the incomplete information market, which makes the market cannot fully react to information. That is to say, incomplete information theory can be more similar to reality capital market to help us better explain the financial visions.Based on the theory of investors’ recognition risk, this paper chooses samples from Shanghai and Shenzhen stock exchanges’ A-share companies during the period of 2004 to 2013. Under the precondition of controlling heterogeneous beliefs, it takes continuously-hold excess returns as alternative indicators of abnormal returns, using the portfolio method and multiple regression method, empirically verify the investors’ recognition risk’s impact on Earnings Momentum and the relationship among information uncertainty, investors’ recognition risk and earnings momentum. The results indicate that:(1) Investors’ recognition risk is positively related with earnings momentum;(2) Earning momentum are more affected by investors’ recognition risk under good news instead of bad news;(3) In the short or medium term, information uncertainty is positively related with earnings momentum; in the long term, information uncertainty and earnings momentum is significantly negatively correlated;(4) In the case of good news, the positive correlation between investors’ recognition risk and earnings momentum is enhanced in the company with more information uncertainty.Compared with the previous literature, this paper may have the following two innovation points: Firstly, it explains the causes of earnings momentum from the perspective of investors’ recognition risk, further enriching and developing the formation mechanism of the earnings momentum. Secondly, from the angle of information uncertainty, this paper further explains the relationship between investors’ recognition risk and earnings momentum, which helps to better cope with the consequences of visions and improve the capital market.