IDEAS home Printed from https://ideas.repec.org/a/pal/palcom/v10y2023i1d10.1057_s41599-023-01592-3.html
   My bibliography  Save this article

Cost stickiness, earnings forecast accuracy, and the informativeness of stock prices about future earnings: evidence from China

Author

Listed:
  • Jia Li

    (Ningbo University of Finance & Economics)

  • Zhoutianyang Sun

    (Suzhou City University)

Abstract

This paper uses the data from the Chinese capital market to study the relationship between cost stickiness, earnings forecast accuracy and stock price information content. The empirical results show that: (1) Cost stickiness significantly affects the earnings response coefficient of stock prices. Lower cost stickiness improves the ability of current returns to reflect future earnings, which is manifested in higher future earnings response coefficient (FERC). (2) Cost stickiness significantly reduces the future earnings response coefficient of non-state-owned enterprises, but does not reduce the future earnings response coefficient of state-owned enterprises. It can be seen that investors have different attitudes towards cost stickiness of listed companies with different property rights in the process of investment decision-making. (3) Cost stickiness significantly increases stock prices synchronicity and decreases the number of company-specific information reflected in stock prices. Further analysis shows that cost stickiness increases earnings forecast accuracy, which is the partial intermediary mechanism for cost stickiness to improve FERC and reduce stock price synchronicity. This paper not only enriches the relevant literature of cost stickiness and earnings response coefficient, but also shows that cost stickiness is an important factor affecting the information efficiency of capital market.

Suggested Citation

  • Jia Li & Zhoutianyang Sun, 2023. "Cost stickiness, earnings forecast accuracy, and the informativeness of stock prices about future earnings: evidence from China," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-16, December.
    • Handle: RePEc:pal:palcom:v:10:y:2023:i:1:d:10.1057_s41599-023-01592-3
    DOI: 10.1057/s41599-023-01592-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41599-023-01592-3
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1057/s41599-023-01592-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gus De Franco & S.P. Kothari & Rodrigo S. Verdi, 2011. "The Benefits of Financial Statement Comparability," Journal of Accounting Research, Wiley Blackwell, vol. 49(4), pages 895-931, September.
    2. Atiase, Rk, 1985. "Predisclosure Information, Firm Capitalization, And Security Price Behavior Around Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 23(1), pages 21-36.
    3. Robert M. Bushman & Joseph D. Piotroski & Abbie J. Smith, 2004. "What Determines Corporate Transparency?," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 207-252, May.
    4. Wurgler, Jeffrey, 2000. "Financial markets and the allocation of capital," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 187-214.
    5. Chen, Shihua & Han, Xu & Jebran, Khalil, 2020. "Social trust environment and tunneling," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(3).
    6. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    7. Jin, Li & Myers, Stewart C., 2006. "R2 around the world: New theory and new tests," Journal of Financial Economics, Elsevier, vol. 79(2), pages 257-292, February.
    8. Qiang Cheng & Fei Du & Xin Wang & Yutao Wang, 2016. "Seeing is believing: analysts’ corporate site visits," Review of Accounting Studies, Springer, vol. 21(4), pages 1245-1286, December.
    9. Jeffrey Wurgler & Ekaterina Zhuravskaya, 2002. "Does Arbitrage Flatten Demand Curves for Stocks?," The Journal of Business, University of Chicago Press, vol. 75(4), pages 583-608, October.
    10. Li, Shan & Brockman, Paul & Zurbruegg, Ralf, 2015. "Cross-listing, firm-specific information, and corporate governance: Evidence from Chinese A-shares and H-shares," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 347-362.
    11. Jie He & Xuan Tian & Huan Yang & Luo Zuo, 2020. "Asymmetric Cost Behavior and Dividend Policy," Journal of Accounting Research, Wiley Blackwell, vol. 58(4), pages 989-1021, September.
    12. James S. Ang & Rebel A. Cole & James Wuh Lin, 2000. "Agency Costs and Ownership Structure," Journal of Finance, American Finance Association, vol. 55(1), pages 81-106, February.
    13. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    14. Art Durnev & Randall Morck & Bernard Yeung, 2004. "Value-Enhancing Capital Budgeting and Firm-specific Stock Return Variation," Journal of Finance, American Finance Association, vol. 59(1), pages 65-105, February.
    15. Jegadeesh, Narasimhan & Kim, Woojin, 2006. "Value of analyst recommendations: International evidence," Journal of Financial Markets, Elsevier, vol. 9(3), pages 274-309, August.
    16. Li, Erica X.N. & Palomino, Francisco, 2014. "Nominal rigidities, asset returns, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 210-225.
    17. Itay Kama & Dan Weiss, 2013. "Do Earnings Targets and Managerial Incentives Affect Sticky Costs?," Journal of Accounting Research, Wiley Blackwell, vol. 51(1), pages 201-224, March.
    18. Mark C. Anderson & Rajiv D. Banker & Surya N. Janakiraman, 2003. "Are Selling, General, and Administrative Costs “Sticky”?," Journal of Accounting Research, Wiley Blackwell, vol. 41(1), pages 47-63, March.
    19. Gu, Zhaoyang & Wu, Joanna Shuang, 2003. "Earnings skewness and analyst forecast bias," Journal of Accounting and Economics, Elsevier, vol. 35(1), pages 5-29, April.
    20. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    21. Lin, Justin Yifu & Li, Zhiyun, 2008. "Policy burden, privatization and soft budget constraint," Journal of Comparative Economics, Elsevier, vol. 36(1), pages 90-102, March.
    22. Lys, Thomas & Sohn, Sungkyu, 1990. "The association between revisions of financial analysts' earnings forecasts and security-price changes," Journal of Accounting and Economics, Elsevier, vol. 13(4), pages 341-363, December.
    23. Gul, Ferdinand A. & Kim, Jeong-Bon & Qiu, Annie A., 2010. "Ownership concentration, foreign shareholding, audit quality, and stock price synchronicity: Evidence from China," Journal of Financial Economics, Elsevier, vol. 95(3), pages 425-442, March.
    24. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    25. Ole†Kristian Hope, 2003. "Accounting Policy Disclosures and Analysts' Forecasts," Contemporary Accounting Research, John Wiley & Sons, vol. 20(2), pages 295-321, June.
    26. Kormendi, Roger & Lipe, Robert, 1987. "Earnings Innovations, Earnings Persistence, and Stock Returns," The Journal of Business, University of Chicago Press, vol. 60(3), pages 323-345, July.
    27. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-319, March.
    28. Hutton, Amy P. & Marcus, Alan J. & Tehranian, Hassan, 2009. "Opaque financial reports, R2, and crash risk," Journal of Financial Economics, Elsevier, vol. 94(1), pages 67-86, October.
    29. Xu, Nianhang & Chan, Kam C. & Jiang, Xuanyu & Yi, Zhihong, 2013. "Do star analysts know more firm-specific information? Evidence from China," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 89-102.
    30. Justin Yifu Lin, 2012. "New Structural Economics : A Framework for Rethinking Development and Policy," World Bank Publications - Books, The World Bank Group, number 2232, December.
    31. Jia Li & Zhengying Luo, 2021. "Product market competition and cost stickiness: Evidence from China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1808-1821, October.
    32. Li, Zhenghui & Zhong, Junhao, 2020. "Impact of economic policy uncertainty shocks on China's financial conditions," Finance Research Letters, Elsevier, vol. 35(C).
    33. Collins, Daniel W. & Kothari, S. P. & Shanken, Jay & Sloan, Richard G., 1994. "Lack of timeliness and noise as explanations for the low contemporaneuos return-earnings association," Journal of Accounting and Economics, Elsevier, vol. 18(3), pages 289-324, November.
    34. Baoyin Qiu & Junli Yu & Kuo Zhang, 2020. "Trust and Stock Price Synchronicity: Evidence from China," Journal of Business Ethics, Springer, vol. 167(1), pages 97-109, November.
    35. Andrei Shleifer & Robert W. Vishny, 1994. "Politicians and Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 995-1025.
    36. Banker, Rajiv D. & Byzalov, Dmitri & Chen, Lei (Tony), 2013. "Employment protection legislation, adjustment costs and cross-country differences in cost behavior," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 111-127.
    37. Andrew C. Call & Nathan Y. Sharp & Paul A. Wong, 2019. "Changes in analysts’ stock recommendations following regulatory action against their brokerage," Review of Accounting Studies, Springer, vol. 24(4), pages 1184-1213, December.
    38. Abarbanell, Jeffery S. & Lanen, William N. & Verrecchia, Robert E., 1995. "Analysts' forecasts as proxies for investor beliefs in empirical research," Journal of Accounting and Economics, Elsevier, vol. 20(1), pages 31-60, July.
    39. Chan, Kalok & Hameed, Allaudeen, 2006. "Stock price synchronicity and analyst coverage in emerging markets," Journal of Financial Economics, Elsevier, vol. 80(1), pages 115-147, April.
    40. Audrey Wen†Hsin Hsu & Hamid Pourjalali, 2015. "The Impact of IAS No. 27 on the Market's Ability to Anticipate Future Earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 32(2), pages 789-813, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ben-Nasr, Hamdi & Cosset, Jean-Claude, 2014. "State Ownership, Political Institutions, and Stock Price Informativeness: Evidence from Privatization," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 179-199.
    2. Meng, Qingbin & Song, Xuan & Liu, Chunlin & Wu, Qun & Zeng, Hongchao, 2020. "The impact of block trades on stock price synchronicity: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 68(C), pages 239-253.
    3. Li, Qinyang & Liu, Xiangqiang & Chen, Jing & Wang, Huaixin, 2022. "Does stock market liberalization reduce stock price synchronicity? —Evidence from the Shanghai-Hong Kong Stock Connect," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 25-38.
    4. Kee-Hong Bae & Jin-Mo Kim & Yang Ni, 2013. "Is Firm-specific Return Variation a Measure of Information Efficiency?," International Review of Finance, International Review of Finance Ltd., vol. 13(4), pages 407-445, December.
    5. Wei Hao & Andrew Prevost & Udomsak Wongchoti, 2018. "Are Low Equity R2 Firms More or Less Transparent? Evidence from the Corporate Bond Market," Financial Management, Financial Management Association International, vol. 47(4), pages 865-909, December.
    6. Longhao Xu & Zhijian James Huang & Fenghua Wen, 2022. "Comment letters and stock price synchronicity: evidence from China," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1387-1421, November.
    7. Cheng, Louis T.W. & Wang, Jacqueline Wenjie, 2021. "Equity ownership and corporate transparency: International evidence," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 143-165.
    8. Chue, Timothy K. & Gul, Ferdinand A. & Mian, G. Mujtaba, 2019. "Aggregate investor sentiment and stock return synchronicity," Journal of Banking & Finance, Elsevier, vol. 108(C).
    9. Beuselinck, C.A.C. & Joos, P.P.M. & Khurana, I.K. & van der Meulen, S., 2010. "Mandatory IFRS Reporting and Stock Price Informativeness," Discussion Paper 2010-82, Tilburg University, Center for Economic Research.
    10. Dang, Tung Lam & Moshirian, Fariborz & Zhang, Bohui, 2015. "Commonality in news around the world," Journal of Financial Economics, Elsevier, vol. 116(1), pages 82-110.
    11. Xu, Weidong & Gao, Xin & Li, Donghui & Zhuang, Mingming & Yang, Shijie, 2022. "Serial acquirers and stock price crash risk: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    12. Boubaker, Sabri & Mansali, Hatem & Rjiba, Hatem, 2014. "Large controlling shareholders and stock price synchronicity," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 80-96.
    13. Dang, Tung Lam & Dang, Man & Hoang, Luong & Nguyen, Lily & Phan, Hoang Long, 2020. "Media coverage and stock price synchronicity," International Review of Financial Analysis, Elsevier, vol. 67(C).
    14. Jong‐Hag Choi & Sunhwa Choi & Linda A. Myers & David Ziebart, 2019. "Financial Statement Comparability and the Informativeness of Stock Prices About Future Earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 36(1), pages 389-417, March.
    15. Kusnadi, Yuanto & Srinidhi, Bin, 2020. "Cross-country differences in the effect of political connections on stock price informativeness," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(2).
    16. Filzen, Joshua J. & Schutte, Maria Gabriela, 2017. "Comovement, financial reporting complexity, and information markets: Evidence from the effect of changes in 10-Q lengths on internet search volumes and peer correlations," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 19-37.
    17. Barka, Zeineb & Benkraiem, Ramzi & Hamza, Taher & Lakhal, Faten & Vigne, Samuel, 2023. "Institutional investor horizon and stock price synchronicity: Do product market competition and analyst coverage matter?," International Review of Financial Analysis, Elsevier, vol. 89(C).
    18. Sun, Lingxia, 2023. "Ultimate government control and stock price crash risk: Evidence from China," Emerging Markets Review, Elsevier, vol. 55(C).
    19. Fu, Junhui & Chen, Xingwei & Liu, Yufang & Chen, Rongda, 2022. "Managerial ability and stock price synchronicity," Research in International Business and Finance, Elsevier, vol. 60(C).
    20. Fargher, Neil & Wee, Marvin, 2019. "The impact of Ball and Brown (1968) on generations of research," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 55-72.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:palcom:v:10:y:2023:i:1:d:10.1057_s41599-023-01592-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: https://www.nature.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.