Cost stickiness, earnings forecast accuracy, and the informativeness of stock prices about future earnings: evidence from China

Abstract

This paper uses the data from the Chinese capital market to study the relationship between cost stickiness, earnings forecast accuracy and stock price information content. The empirical results show that: (1) Cost stickiness significantly affects the earnings response coefficient of stock prices. Lower cost stickiness improves the ability of current returns to reflect future earnings, which is manifested in higher future earnings response coefficient (FERC). (2) Cost stickiness significantly reduces the future earnings response coefficient of non-state-owned enterprises, but does not reduce the future earnings response coefficient of state-owned enterprises. It can be seen that investors have different attitudes towards cost stickiness of listed companies with different property rights in the process of investment decision-making. (3) Cost stickiness significantly increases stock prices synchronicity and decreases the number of company-specific information reflected in stock prices. Further analysis shows that cost stickiness increases earnings forecast accuracy, which is the partial intermediary mechanism for cost stickiness to improve FERC and reduce stock price synchronicity. This paper not only enriches the relevant literature of cost stickiness and earnings response coefficient, but also shows that cost stickiness is an important factor affecting the information efficiency of capital market.