The Association between Earnings and Returns: A Comparative Study between the Chinese and US S tock Markets

This study examines the earnings-return relation in the Chinese and US stock markets. We first examine whether the value relevance of earnings in the US stock market for the period 1968 to 1986 in Easton and Harris (1991) holds for the period 1998 to 2011. We find that the value relevance of earnings levels decreased significantly in the 1998-2011 period. We then examine the earnings-return relation between the Chinese and US stock markets in the 1998-2011 period. We find that the explanatory power of earnings levels differs between these two markets. Specifically, in the US market, the earnings level variable has a lower relative explanatory power than the earnings change variable and the earnings level variable has very limited incremental explanatory power in the presence of the earnings change variable. However, in the Chinese market, earnings levels and earnings changes have similar relative and incremental explanatory power. The disparity in the relevance of earnings levels between the two markets may be attributable to differences in institutional factors and firm characteristics.