Article

China Accounting and Finance Review

, 15:1

First online:

Open Access This content is freely available online to anyone, anywhere at any time.

行业竞争与公司盈余持续性:基于实物期权理论1

  • Xinyuan ChenAffiliated withSchool of Accountancy and the Institute of Accounting and Finance, Shanghai University of Finance and Economics Email author 
  • , Qinglu JinAffiliated withSchool of Accountancy and the Institute of Accounting and Finance, Shanghai University of Finance and Economics Email author 
  • , Tusheng XiaoAffiliated withSchool of Accountancy, Central University of Finance and Economics

Industry Competition and Earnings Persistence:Empirical Tests Based on Real Options Theory1

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

Keywords

Industry Competition Earnings Persistence Growth Option Abandonment Option