Do Investors See Through Accounting Profitability and Recognize Efficiency? Evidence from Chinese Listed Companies

Wenjuan Xie ()
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Wenjuan Xie: University of New Hampshire, USA

Multinational Finance Journal, 2013, vol. 17, issue 3-4, 243-293

Abstract: This paper studies the accounting performance measure, profit efficiency and investor valuation of 1,262 Chinese firms listed in Shanghai and Shenzhen Stock Exchanges from 2001 to 2010. Profit efficiency is defined as the ratio of actual profit realized to the optimal profit described by stochastic frontier approach. An estimation of robust ordinary least square model for accounting performance measures (ROA) controlling for industry effect results in negative skewness of the residuals, indicating the existence of profit inefficiency. A year-by-year cross-section stochastic frontier analysis documents a declining pattern of accounting performance and a contrastive increasing tendency of profit efficiency. Linking the market valuation ratios to profit efficiency illustrates a significant empirical relationship that Chinese investors reward firms of higher efficiency with higher market valuation. The over-time improvement of efficiency is also associated with increased market valuation.

Keywords: market valuation; profitability; efficiency; stochastic frontier; chinese listed firms (search for similar items in EconPapers)
JEL-codes: G15 M11 M16 O16 O53 P34 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:mfj:journl:v:17:y:2013:i:3-4:p:243-293

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