The Research On The Influence Of Profit Quality On Firm Value

Profit quality is the quality of the firm profit’ formation process and the results of thefirm profit. It shows the true level of companies’ operating performance, forecasts companies’operating performance in the future, and it is the internal factor to impact on firm value. Thehigher of the earnings persistence, the better of the return on assets, and the better of theability to pay for firm profit, the profit quality’ level is higher. Profit structure is one of themost important means to measure the earnings persistence. Profit structure refers to thevarious components in the profit share and the ratio between the mutual relationships betweeneach component. Different components of profit have a different level of earnings persistence,affect the level of profit quality and thereby affect the firm value. Nowadays the stock marketis developing, the transparency of accounting information has been improved constantly andthe behavior of investors tends to be more rationality. Then there must be more investorsconcerned the influence of profit quality on firm value. However, there is few researchreported that the profit quality have the impact on the firm value directly according to theviewpoint of profit structure. At present, the revolution of the financial statements is coming.It is significant that we classify the income statement according to the nature of operatingactivities and investment activities and research the influence of profit quality on firm value.For this research, it is mainly from the quality of profit structure, the quality of assetsvalue-added and the quality of the ability to get cash.Based on this, this article uses multiple linear regression model and utilizes Tobin’s Q torepresent firm value, then utilizesEVA sto represent firm value for robustness test, and itanalyzes empirically the influence of profit quality on firm value with the data of allmanufacturing A-share listed companies stock exchange during the period of2007-2012. Theresults showed that:（1）Among the each index of quality of profit structure, the ratio of core profits andgross profits and return on operating assets have a significant positive correlation with thefirm value. It shows that the ratio of investment income and gross profits quality, however,return on financial assets have no significant effects on the firm value. The ratio of assetsdevaluation and gross profits, the ratio of net non-operating income and gross profits have nosignificant effects on the firm value. Then it suggests that the core profit and return onoperating assets have effect on the firm value directly. However, it is difficult for investmentactivities, gains and losses and other non-core activities and non-operating gains and losses to have a substantial impact on firm value.(2) Return on assets and return on operating assets have a significant positive correlationwith the firm value. Return on assets can better reflect the firm value than return on operatingassets. It suggests that the effect of assets operation have an important influence to firmvalue. Especially in the era of knowledge economy, companies administrators should paymore attention to asset-light strategy, which is characterized in reducing the funds ofoccupancy and improving the operational efficiency of assets.(3) Net income growth, asset-liability ratio and the size of company have a uncertaintyrelationship with firm value in different dependent variable. Specifically, when utilizingTobin’s Q to represent firm value, net income growth have no significant effects on the firmvalue, and asset-liability ratio and the size of the company have a significant negativecorrelation relationship with firm value. When utilizingEVA sto represent firm value, netincome growth has a significant negative correlation relationship with firm value, andasset-liability ratio has a significant negative correlation relationship with firm value, and thesize of the company has no significant effects on the firm value. Then it shows that these threevariables have an effect on the firm value. It reminds that companies should control their ownasset-liability ratio and the size of company reasonably according to their own situation inorder to achieve sustainable development of companies under different environment.