Earnings Components,Persistence Differences And The Anomaly

As the basis for capital market to allocate resources,reasonable and correct pricing is the key for capital market to serve the real economy.It is an important proposition to study the pricing efficiency of capital market based on this background.According to valuation theory,earnings persistence is the inherent requirement of stock pricing,while the aggregate earnings cover up the structure of earnings,resulting in the loss of persistent information,which often constitutes an important reason for the anomaly under the functional fixation.With the prominence of the group characteristics of Listed Companies in China,the parent-subsidiary structure is an unavoidable factor in discussing the earnings persistence.Based on the double disclosure system of accounting information in China,this paper uses consolidated statements and parent company statements to split the parent-subsidiary structure of consolidated earnings,according to the distribution of earnings at the principal-agent level,and then explores the difference of earnings persistence and market anomalies.This is not only an expansion of relevant research,but also a useful reference for China's capital market to better serve the real economy.This paper takes A-share listed companies in China from 2007 to 2016 as the research object and mainly focuses on the following three issues step by step.Firstly,is there a significantly different persistence between parent earnings and subsidiary earnings? Secondly,if there are significant differences,can stock market pricing effectively identify such differences? Thirdly,if the market fails to recognize the difference in persistence between parent earnings and subsidiary earnings,will stock prices correct for this mispricing when earnings are reported?On the basis of reviewing the existing research literature and drawing lessons from the effective market theory,behavioral finance theory and the principal-agent theory,this paper makes theoretical analysis,puts forward research hypothesis and carries out empirical test.The main findings and conclusions are as follows:(1)The persistence of parent earnings is significantly higher than that of subsidiary earnings.The study finds that parent earnings have a stronger predictive ability to consolidated earnings in the future than subsidiary earnings,which shows that the parent earnings are more persistent.Further research finds that when the parent company owns more subsidiary shares,the difference of persistence between parent earnings and subsidiary earnings is smaller;when the parent company is located in the area with higher marketization process,the difference of persistence between parent earnings and subsidiary earnings is larger;at the same time,when the product market competition of listed companies is more intense,the difference is also larger.Considering the merger scenario,the exclusion of competitive hypothesis,the principal-agent efficiency of subsidiary companies,and the order of magnitude difference,the research conclusion remains unchanged.The results show that the increase of agency hierarchy and the extension of control chain caused by principal-agent between parent company and subsidiary companies are important factors affecting earnings persistence,while the increase of parent company's control over subsidiary companies helps to alleviate the earnings persistence differences caused by multi-level principal-agent,but marketization degree and product market competition will aggravate the earnings persistence differences.(2)Stock prices do not effectively identify the difference of persistence between parent earnings and subsidiary earnings,and they relatively overestimate the earnings of subsidiary companies.Mishkin test shows that there is no significant difference between parent earnings pricing coefficient and subsidiary earnings pricing coefficient when parent earnings persistence coefficient is significantly larger than subsidiary earnings persistence coefficient,and using this mispricing to construct a portfolio can obtain 7.4%excess return in the next year.Further research finds that the relative overestimation of subsidiary earnings is more evident when the parent company owns fewer shares of subsidiary companies,the parent company is located in the area with higher marketization process,the product market competition is more fierce,fewer analysts follow,and the quality of information disclosure is lower.By excluding the accrual hypothesis and growth effect,the results show that the anomaly in this paper are independent of the accrual anomaly and growth anomaly.And after controlling arbitrage costs,the anomaly still exist.The results show that due to the functional fixation,stock pricing fails to recognize the difference of persistence between parent earnings and subsidiary earnings,resulting in wrong pricing and forming a new market anomaly,and the control of parent company over subsidiary companies,marketization degree,product market competition,analysts coverage and information disclosure quality are important factors affecting this anomaly.(3)The study finds that the higher the proportion of subsidiary earnings,the lower the cumulative excess earnings,showing a modified feature.Through the construction of multiple regression model,the study shows that the proportion of subsidiary earnings is negatively correlated with the cumulative excess earnings of annual earnings announcements,and the negative correlation is more significant when the parent company holds less subsidiary shares,the parent company is located in the area with higher marketization process,the product market competition is more fierce,fewer analysts follow,and the quality of information disclosure is lower.Through the test of time trend,controlling individual fixed effect and changing the calculation method of excess income,the research conclusion remains unchanged.The results show that price correction occurred during the annual earnings announcement,which proves the existence of mispricing,and the control of parent company over subsidiary companies,marketization degree,product market competition,analysts coverage and information disclosure quality are also important factors affecting this reversal feature.Compared with the existing research,the possible contributions of this paper are as follows:(1)Based on the group characteristics of listed companies,this paper discusses the difference of earnings persistence from the parent-subsidiary structure,which not only provides a new perspective to study earnings persistence,but also provides a new way to decompose the earnings components.Based on the double disclosure of financial statements in China,using the relationship between parent company's statements and consolidated statements,according to the vertical level of principal-agent,the consolidated earnings are divided into parent earnings and subsidiary earnings,and then this paper discusses their difference in earnings persistence,which further opens the black box of consolidated earnings of listed companies,and is a useful supplement to the content of earnings persistence research.At the same time,it is different from the existing studies that define subsidiary earnings according to the difference between the consolidated earnings statements and the parent earnings statements.This paper strips the dividend income received from subsidiaries companies from the parent earnings,which provides a new idea on the decomposition of the earnings components.(2)This paper finds new mispricing and expands the research content of market anomalies.Based on the above-mentioned persistence differences,this paper finds that stock prices do not effectively identify the difference in persistence between parent earnings and subsidiary earnings,and it shows that stock prices relatively overestimates subsidiary earnings,so the new anomaly is found.This not only expands the research content of market anomalies from the perspective of parent-subsidiary structure,but also further tests the pricing efficiency of capital market in China.(3)According to the group characteristics of listed companies and the vertical distribution of earnings at the principal-agent level in the group,the principal-agent theory is introduced as an analysis tool.It is found that the efficiency attenuation caused by multi-level principal-agent will reduce earnings persistence,thus expanding the theoretical analysis framework of earnings persistence.(4)By taking the corporate entity of the listed company as the parent company and the companies controlled by it as the subsidiary companies,this paper makes an analysis of the persistence difference and stock pricing,which provides an incremental contribution to the research contents of listed companies and enterprise groups.Listed company has the dual identity of both subsidiary company of enterprise groups and group parent company formed by itself.From the perspective of enterprise groups,this paper enriches the research content of enterprise groups by linking group characteristics with earnings persistence and stock pricing through listed companies.For the listed companies,this paper takes the corporate entity of listed companies as the parent company to analyze,which is a supplement to the multi-dimensional research content of listed companies.