Chinese stock prices predict good earnings for a bit, then bad ones

New research shows that in China's stock market, high stock prices predict good earnings for the next few years. But those same high prices also predict weaker earnings three to five years later, because companies use accounting tricks to make themselves look better in the short term.

Investors in China's stock market often look at current stock prices to guess future company performance. This paper shows that strategy works for a few years, then backfires. Companies are using one-off accounting adjustments to boost their short-term numbers, creating a misleading picture for anyone not looking closely at the long game.