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The Information Content of Earnings Components: Evidence from the Chinese Stock Market

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  • Gongmeng Chen
  • Michael Firth
  • Daniel Ning Gao
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    Abstract

    China's listed firms report substantial non-operating revenues and expenses. We argue that these non-core earnings should have different properties and different valuation implications than operating or core earnings. Furthermore, the different types of firm ownership may have differential impacts on the information content of earnings components. Based on data from 1996 to 2008, we find that core earnings are more persistent than non-core earnings. Because of this, core earnings have a greater association with contemporaneous stock returns. However, the stock market does not fully incorporate all the information in earnings; we find that core earnings are undervalued and non-core earnings are overvalued. This effect is much reduced for privately controlled listed firms. We develop an investment trading strategy to exploit these market inefficiencies.

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    File URL: http://hdl.handle.net/10.1080/09638180.2011.599929
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal European Accounting Review.

    Volume (Year): 20 (2011)
    Issue (Month): 4 (May)
    Pages: 669-692

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    Handle: RePEc:taf:euract:v:20:y:2011:i:4:p:669-692

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    Web page: http://www.tandfonline.com/REAR20

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    Cited by:
    1. Schiemann, Frank & Guenther, Thomas, 2013. "Earnings Predictability, Value Relevance, and Employee Expenses," The International Journal of Accounting, Elsevier, vol. 48(2), pages 149-172.

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