Abstract
Using A-share listed companies in China from 1999 to 2010, this paper investigates the influence of industry competition on earnings persistence from the perspective of the real options theory. Different from the traditional industrial economics theory, analyses based on the real options theory show that the influence of industry competition on earnings persistence may be nonlinear and that the relationship between the two may vary with the firm’s operating efficiency or profitability. Our empirical results show that for companies with low profitability, intense industry competition can encourage management to exercise abandonment options more effectively, thereby reducing the persistence of earnings; in contrast, for companies with high profitability, intense industry competition can encourage management to exercise growth options more effectively and offset the mean reverting effect, thus increasing the persistence of earnings. Additional tests illustrate that the influence of industry competition on earnings persistence is also reflected in the relationship between stock price changes and earnings changes, that is, the earnings response coefficient. Overall, this paper suggests that the influence of industry competition on the execution of real options is reflected in the earnings pattern
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We appreciate the helpful comments made by Dr Nancy Su (the executive editor) and two anonymous reviewers. We acknowledge the financial support of the research project (10JJD630006 and 11JJD790008) sponsored by the Ministry of Education through the Institute of Finance and Accounting at Shanghai University of Finance and Economics (SUFE) and the support from the National Natural Science Foundation of China (71072036, 71272012, and 71272008), the PhD Innovation Foundation (CXJJ-2011-382), and the Outstanding Doctoral Dissertation Foundation of SUFE. This study is also supported by grants from the “Project 211” Fund of the Central University of Finance and Economics. The authors of this paper are listed in alphabetical order by last name in English. We appreciate the valuable comments from Professors Fusheng Chen, Shengquan Hao, Shangkun Liang, and Guochang Zhang. We are also grateful to participants in the 2012 International Symposium on China Accounting and Financial Research, the 11th International Symposium on Empirical Accounting Research in China, and workshops at the School of Accountancy of SUFE. Any errors are our own
**nyuan Chen, School of Accountancy and the Institute of Accounting and Finance, Shanghai University of Finance and Economics, 111 Wuchuan Road, Shanghai (200433); Email:xychen@mail.shufe.edu.cn. Qinglu ** (Corresponding Author), School of Accountancy and the Institute of Accounting and Finance, Shanghai University of Finance and Economics, 111 Wuchuan Road, Shanghai (200433); Email: acjql@mail.shufe.edu.cn. Tusheng **ao, School of Accountancy, Central University of Finance and Economics, 39 South College Road, Bei**g (100081); Email:tsh.xiao@aliyun.com.
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Chen, X., **, Q. & **ao, T. Industry Competition and Earnings Persistence:Empirical Tests Based on Real Options Theory1. China Account Financ Rev 15, 1 (2013). https://doi.org/10.7603/s40570-013-0009-4
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DOI: https://doi.org/10.7603/s40570-013-0009-4