On the pricing of the persistence of earnings components in China

Abstract

We examine the market pricing of the persistence of earnings components in the Chinese stock market. We find that the market on average misprices the persistence of total earnings. By decomposing total earnings into components, we find that while the market shows no evident mispricing of the persistence of the industry-wide earnings component, it does misprice the persistence of firm-specific earnings, in particular, firm-specific cash flows. Moreover, the mispricing of firm-specific earnings is more pronounced in the sample of firms with low firm-level disclosure quality. Our findings indicate that “investor fixation” is not a primary driver of the mispricing of the persistence of earnings components in China; instead, this mispricing is largely driven by the disclosure quality difference between earnings components.