Does the Cross-Sectional Equation EPSt+1 = a*Pt + b*EPSt + ut+1 Differ between China and the US?*

Abstract

Abstract This paper compares Chinese (CH) and US firms in an earnings per share (EPS) forecasting setting. Next year’s EPS depend on (i) current price and (ii) current EPS. A comparison gives rise to the following question: what will the two financial markets have in common and what will most likely be different? The evidence presented suggests that on a very basic level, China does not differ from the US. For both economies, the data show that the right hand side of the equation can be conceptualised as a weighted average of the two variables when rescaled. This scaling procedure depends on the earnings rate in the capital markets. However, the weights differ: For CH firms, the second right hand side (RHS) variable, current EPS, is relatively more important than the first, price; this finding stands in contrast to the US, where the two RHS variables are of about equal importance. The paper also elaborates on a methodological subject: the conclusions are not available if one uses ordinary least squares (OLS). It shows that a robust estimation method due to Theil (1950) and Sen (1968) leads to two empirical conclusions. More generally, the paper contends that it makes no sense to compare CH and US financial market data unless the issue at hand is specific, straightforward, and relies on robust estimation.