A replication study of ball and brown (1968): comparative analysis of China and the US

Abstract

We replicate Ball and Brown (1968) using current US and Chinese data. We demonstrate that the significant relation between annual earnings changes and annual stock returns documented in Ball and Brown (1968) extends and holds to recent US data over the period 1971-2011 and that stock prices continue to react with some delay to unexpected earnings. This association result is confirmed using Chinese data over the period 1995-2011. However, our analysis reveals a key difference in relative magnitude—the Chinese stock market responds much more strongly to good news, and much less strongly to bad news, than the US market. In addition, we examine alternative selections of samples and benchmark returns using Chinese data. Our results suggest that the smaller magnitude and drift of market reaction in China cannot be driven by pre-warnings of earnings, firms in “abnormal trading status”, timing of earnings announcements, or alternative choices of benchmark returns, although the magnitude difference is greatly reduced when the financial crisis of 2007-2009 is excluded. Overall, our results confirm that earnings drive stock returns in both the US and China, but the market reaction to bad earnings news is notably muted in China, suggesting that non-earnings factors are more important in China.