Research On The Impact Of Firm-Specific Earning On Stock Return

In spite of the great progress made in the mechanism construction since the establishment of china's stock market in 1990s,the shortcoming of information environment governance is still obvious.Due to the lag or lack of relevant mechanism arrangements,inefficient information environment has become one of main obstacles hindering the sustained and healthy development of stock market.Those problems existing in China's stock market mainly stand out in two aspects:Firstly,low-quality information deriving from lack of regulation is full of the whole market,and secondly information-oriented price adjustment mechanism is artificially twisted or jammed.On the one hand,the phenomena of profit manipulation even financial report fraud appear again and again without an end,which severely damage the credibility of information reported by listed companies.On the other hand,with the investor structure mostly made up of individual investors,who are believed to be popularly lack of experience and skills of collecting and analyzing private information,easily and cheaply accessible public information like macroeconomic and industry-level news has become the main resource that influence decisions of investors and drives the stock price,resulting the extent of stock price synchronicity in china's stock market comes to the top around the world.In conclusion,it is the inefficiency of information environment that prevents stock market fully exploits its fundamental function of allocating capital among companies efficientlyIn this context,there are more and more scholars realizing the important role that firm-specific information plays in the progress of improving information environment governance Although primitive information disclosed by listed companies is inconvincible in terms of investors,it is believed that there is some kind of technique can help turn low-quality information into high-quality one by cleaning and eliminating noise contained in raw data,among which the decomposition of earning is such one method.In this paper,earning of a company is decomposed into systematic component and unsystematic component,and we define the unsystematic part as so-called firm-specific earning.In our further study,the concept of firm-specific earning is regarded as an effective indicator of distinguishing good companies from bad companies,and we systematically study its influence on stock priceOur results reveal that:Firstly,The earning growth rate of companies,similar to the stock return,is affected by some public exogenous factors,which means it can be decomposed into systematic component and unsystematic component;secondly,there is significantly positive relationship existing between firm-specific earning and stock return,which remains steady and significant even adjusted by three-factor model;thirdly,firm-specific earning could not only help explain the price momentum premium,but also enable us to construct an enhanced reversal arbitrage strategy,which is proved to be significantly outperform traditional version.