Aggregate Accounting Earnings and Security Returns: China Evidence and the Replication of US Results

Abstract

This paper examines the earnings-return association over long return intervals. The research design is built upon one important accounting intuition: as earnings are aggregated over longer intervals, the effect of earnings measurement error and the time lag between earnings recognition and market reaction slowly dwindles. Therefore, over time, we should observe an improving association between (aggregate) earnings and stock return. In this study, we first replicate the results of Easton, Harris, and Ohlson (1992) for the same period of 1968-1986 and find very similar results under refined correlation metrics. Second, we expand coverage to test US data from 1962 to 2011 and find that their prediction holds for the past 50 years in the US market. Third, our post-1992 China and US data generate the same pattern of rising earnings-return correlation as the return interval expands, despite China’s immature stock market. Further comparison indicates that the earnings-return correlation in China is lower than that in the US market in the same period of 1992-2011. Finally, to make our results comparable to the original ones in Easton, Harris, and Ohlson (1992), we also report the 1992-2011 results under the original metrics, such as R2 and concordant pair percentage; we still reach the same conclusions. Overall, the empirical results support Easton, Harris, and Ohlson’s theory in both the US market and the emerging China market, extending the external validity of their theory to the international capital market.

The effects of a mixed approach toward management earnings forecasts: Evidence from China

“…Huang and Li () find that Chinese firms experience significant return reaction and trading volume when annual earnings are reported, but have more information leakage prior to the report date and more prolonged return drift after the report date than US firms. Du, Tang, and Zhang () find that the earnings‐return correlations for a given return interval are lower in China than in the US.…”