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This study mainly applies ERC (Earnings Response Coefficient) model to compare
the information contents of earnings in Taiwan and China stock markets. In
addition, this study investigates the disclosure rules of these two markets
in order to develop related hypotheses.
This study includes four hypotheses:
(1) information environment hypothesis,
(2) earning level hypothesis,
(3) earnings components hypothesis, and
(4) ERC determinants hypothesis. The samples strategically select from
listed companies in Taiwan and China to facilitate our comparisons.
The findings can be summarized as follows.
1. In the Taiwan stock market, the firm size is not a significant factor for
determining optimal return window; but in the China stock market, the response
of larger firms is earlier than smaller firms to the earnings announcement
(information environment hypothesis).
2. The Easton-Harris earnings level variable can significantly increase the
explanatory power of ERC in the Taiwan stock market; but it
cannot significantly
increase the explanatory power of ERC in the China stock market (earnings
level hypothesis).
3. The earnings components can increase the explanatory power of
earnings/return relationship in both Taiwan and China stock markets.
In addition, the non-operating components have better explanatory power
than operating components in earnings (earnings components hypothesis).
4. The determinants of ERC can increase the explanatory power of
earnings/return relationship; but the determinants of ERC have negative
effects of the explanatory power of earnings/return relationship.
Key Words: Taiwan stock market, China stock market, ERC (Earnings Response
Coefficient) model, earnings level, earnings components, information
environment, information contents of earnings
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