Asymmetry in Earnings-Returns Relations: The Case of China

Abstract

The earnings-returns relation asymmetry indicates the changing relation between earnings and returns when the nature of earnings information differs in a certain way. Literature has documented a variety of asymmetric relations and provided a wide range of explanations. Hayn (1995) accounted for the lower ERC for loss by Abandonment Option Theory. Basu (1997) synthesized a series of asymmetric findings and attributed them to accounting conservatism. Burgstahler and Dichev (1997) documented the asymmetric distributions of scaled earnings and earnings changes as results of earnings management. All these studies intended to offer an explanation to certain findings based on the U.S. data. In this paper, we propose seven ways to measure various aspects of asymmetry in earnings-returns relations in China. Our findings suggest that (1) asymmetry in earnings-returns relation is ubiquitous, but the nature of asymmetry varies from case to case, (2) the measurement of asymmetry crucially depends on the specification of asymmetry threshold, (3) there may not be a universal explanation to this asymmetry, (4) earnings-returns relation may be rather idiosyncratic, and (5) the asymmetric in earnings-returns relation seems associated with the regulation on right offering in China.