Earnings Management and Price Informativeness

We investigate the relationship between stock prices and future earnings in China's A-share market. In the cross-section, firms with higher market valuations report higher earnings over the subsequent one to five years, suggesting that stock prices contain information about future fundamentals. In the time series, however, we find evidence of earnings reversal: higher stock prices predict weaker earnings growth three to five years ahead, consistent with short-term earnings management induced by stock-price pressures. We further document such earnings management through non-recurring gains and losses (NRGLs) and use the 2020 delisting rule reform as a natural experiment to examine these mechanisms.