An empirical study of the earnings–returns association: an evidence from China’s A-share market

Fahd Alduais ()
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Fahd Alduais: National Institute of Administrative Sciences

Future Business Journal, 2020, vol. 6, issue 1, 1-12

Abstract: Abstract This paper aims to investigate the returns–earnings association in the context of the Chinese capital market. Previously, the investigations brought about disputable outcomes concerning the handiness of models utilizing earnings levels or earnings changes as the informative factors. In this investigation we create theories from the slack structure between stock returns and earnings and perform an empirical test. In an introductory context, this study examines the above relationship applying three models using data from CSMAR database of Chinese listed companies A shares over the sample period of 10 years 2007–2016. The results demonstrated a significant value relevancy of accounting earnings. Specially, in the Chinese stock market the change in the earnings model interprets the stock returns less than earnings level model. Furthermore, the use of cross-sectional accumulated data results in a enormous increase in the explanatory power of earnings for returns yielding more significant earnings response coefficients. The explanatory power of the model that included both variables was (1.17%) that is more than the result of using one explanatory variable in the model implemented for all years and all companies, whether the variable was the earning level (1.03%) or the change in earning (0.75%). The findings recommend that future research should control for the impacts of the temporal increase in market returns before making value relevance inferences from the debilitating association between earnings and returns. The paper contributes to the incomplete framework of research on returns–earnings association as the main driver for the temporal reduction in value relevance of earnings.

Keywords: Chinese stock market; Stock returns; Change in earrings; Earnings response coefficients (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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DOI: 10.1186/s43093-020-0010-8

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