Earnings Management and Price Informativeness

We address the puzzling finding by Carpenter, Lu, and Whitelaw (2021) that stock prices in the Chinese A-share market are as informative about future earnings as those in the U.S. market. Contrary to their interpretation, we argue that, in the presence of prevalent earnings management and less sophisticated investors, firms may manage earnings to align with expectations reflected in their stock valuations. Our analysis reveals that Chinese stocks with higher valuations tend to exhibit higher earnings in the subsequent three years, but this does not translate to increased payouts to shareholders and the higher earnings reverse in the long run. Additionally, we provide evidence of earnings management through non-recurring gains and losses (NRGL), leveraging the 20192020 reform on delisting rules as an exogenous shock to earnings management practices.