Evidence from China on the value relevance of operating income vs. below-the-line items
Document Type
Journal article
Source Publication
International Journal of Accounting
Publication Date
1-1-2004
Volume
39
Issue
4
First Page
339
Last Page
364
Keywords
Below-the-line items, Earnings-response coefficients, Persistence of earnings, Special items, Value relevance of recurring vs. nonrecurring earnings
Abstract
This study investigates the value relevance of operating income vs. below-the-line items in the Chinese stock market. The motivations for this study are twofold. First, there is a need for empirical evidence of the value relevance of earnings components given that previous findings of value relevance in China at the aggregate level have often been questioned in the literature. Second, the reporting environment for earnings components in China provides an interesting opportunity to present additional evidence on the pricing of persistent vs. less persistent earnings. Chinese GAAP is more specific in defining the scope and specifying the format of reporting earnings components with different levels of persistence. In addition, differing from the U.S. evidence in the extant literature, below-the-line items in China is overwhelmingly income-increasing and frequently account for a large percentage of a firm's reported net income. By linking valuation analysis with earnings time-series properties, we present additional evidence to support value relevance in China: An earnings component is impounded in stock prices as long as it is persistent and nonpersistent below-the-line items are value irrelevant. However, the time-series properties of earnings components are not fully priced by the market. The earnings-response coefficients are larger for below-the-line items than for operating income, although below-the-line items are less persistent and have lower predictive power. In discussing this pricing anomaly, we identify some unique institutional factors that may be responsible for the results.
DOI
10.1016/j.intacc.2004.06.012
Print ISSN
00207063
Funding Information
Financial support from the Chinese Ministry of Education 10th Five-Year Plan project, “Accounting Information and Resources Allocation in the Chinese Capital Markets” (Project No. 01JA790015). {01JA790015}
Publisher Statement
Copyright © 2004 University of Illinois. All rights reserved. Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Chen, S., & Wang, Y. (2004). Evidence from China on the value relevance of operating income vs. below-the-line items. International Journal of Accounting, 39(4), 339-364. doi: 10.1016/j.intacc.2004.06.012