Cumulative Effect, Targeted Poverty Alleviation, and Firm Value: Evidence from China

Abstract

This paper studies the influence of the annual cumulative earnings of Chinese listed TPA (targeted poverty alleviation) companies before 2004 on the companies’ value using data from 2012 to 2019, measures the long-term earnings persistence of these companies with the variable of the cumulative earnings averaged by the market price of each company at the current year’s end, and obtains a model of the company’s value combined with each company’s earnings persistence and the long-term competitive strength of its products. The cumulative data from 2004 to 2012, 2005 to 2013…, and 2011 to 2019 provide the data used for regression from 2012 to 2019. The TPA companies’ value is affected by long-term cumulative net profits and long-term competitive advantage. The higher the company’s accumulated net profit, the longer the duration of the long-term competitive advantage, the more stable the company’s value increase, and the higher the quality of the value increase.

1. Introduction

The determinant of firm value is the core concept concerning managers and investors. It is also a significant direction that scholars have explored to study companies’ future value and predict their future earnings. These studies aim to help the state and society screen strong companies with comprehensive quality in the market, help notable companies grow, and eliminate illegal or unethical companies. In the past, the definition of a strong company only focused on the company’s ability to make money and develop, without paying attention to the company’s social responsibility. However, in recent years, the state and relevant parties began to pay more attention to companies’ social responsibility. As a result, the number of listed companies providing corporate social responsibility (CSR) or environmental, social, and governance (ESG) reports in China is increasing rapidly. In 2019, fewer than 800 listed companies disclosed CSR or ESG reports. As of 30 April 2022, 1408 listed companies have announced independent CSR or ESG reports. In 2012, the Chinese central government adopted a targeted poverty alleviation (TPA) strategy, aiming to achieve comprehensive poverty alleviation by 2020. In 2021, the government effectively connected this policy with rural revitalization [1]. Many companies have followed this policy and contributed to helping some areas of society out of poverty. These companies are high in quality. However, their financial and market strength and social responsibility determine their value. Therefore, they have a long-term sustainable development ability.

In the previous literature, the most direct relationship between the persistence of company earnings positively correlated with firm value. The authors of [2] first discussed the motivation behind earnings sustainability from the perspective of internal control quality and an economic consequence of earnings sustainability from the perspective of corporate value in China. They found that the higher the earnings persistence, the more accurately future earnings could be predicted, which is conducive to evaluating financial performance and provides more precise information for the judgment of the value of companies. Accounting information can provide investors with short-term current-profit data. However, errors may arise when estimating quickly accrued profits, which distort the firm value judgment and cause investment failure [3]. The cash-dividend-issuing behavior of Chinese listed companies shows their earnings persistence or future profitability, and the companies that give cash dividends offer strong continuation in their earnings growth [4]. Since companies with high growth have better operating conditions, they engage in less earnings management, and their earnings persistence is high [5]. The data based on accounting should include long-term information, such as long-term operational and financing information [6]. Permanent earnings, such as core business profits, have a highly positive impact on a company’s market price [7]. The continuation of company earnings results from several components’ persistence [8]. The excessive capital accumulation by major shareholders of listed companies affects the future performance of listed companies [9]. Most of the negative correlations appear in the case of earnings management [10,11,12,13,14]. Higher product prices not only succeed without reducing the market demand for products but have the effect of product hoarding and speculation, which significantly increase the company’s sales revenue and net profit [15]. They are more advantageous and profitable for companies that are more difficult to imitate and are innovative [16]. If products strengthen companies’ competitive advantage, the value-adding effect reinforces this process [17]. In highly competitive markets, CEO power is positively correlated with company value, and company governance is vital. In situations of demand with low competitiveness, CEO power does not influence company value [18].

Based on the above analysis, the content of this paper is equivalent to a study of how the earnings persistence of Chinese listed TPA companies affects their value from the perspective of product market strength. This study aims to answer several questions: first, why does TPA companies have the ability to undertake social responsibility to support targeted poverty alleviation policies? Second, how does the market determine the value of listed TPA companies? Third, does TPA companies’ social responsibility give them long-term advantages in value increases over companies that do not engage in social responsibility? Fourth, are TPA companies’ long-term value and short-term market value contradictory?

The rest of the article is arranged as follows: Section 2 demonstrates the theoretical framework, literature review, and research hypothesis; Section 3 presents the research methods and data; Section 4 shows the results analysis and robustness test; and Section 5 presents the conclusion.

2. Theoretical Framework, Literature Review, and Research Hypothesis

2.1. Earnings Persistence, Earnings Volatility, and TPA Firm Value

2.1.1. Earnings Persistence and TPA Firm Value

According to stakeholder theory, to ensure a TPA company’s sustainable development, in addition to its shareholders, it should also be responsible to other stakeholders. Therefore, TPA corporate governance should consider the interests of internal and external stakeholders [19]. Income sustainability refers to the possibility that increases in a company can maintain its current or previous income in the future [20]. For the first category, with the most important continuation, the sustainable trend accumulated in its past few years significantly affects the present and future. Therefore, based on the above research, this paper takes the ratio of cumulative earnings divided by the company’s market price as the dependent variable of corporate value. For this variable, the substantive significance of corporate value regression lies in the relationship between the cumulative income at the same level and the corporate value [21].

2.1.2. Earnings Volatility and Firm Value

The persistence of earnings can predict future earnings, but this predictability is limited, especially for long-term profits. Income fluctuation makes income prediction more complicated and even affects the prognosis of short-term income. Volatility reduces the predictability of returns. Earnings volatility is unstable and negatively correlated with predictability because more unstable profits are more challenging to forecast [22]. In the previous literature, many methods have been used to measure volatility. This paper uses the number of cumulative earnings times in a period to measure earnings volatility. The higher the number of cumulative earnings times, the higher the income stability, the smaller the volatility, and the higher the predictability. Based on the above analysis, the first two hypotheses of this paper are as follows:

Hypothesis 1 (H1).

When the cumulative total income is high and the persistence of the TPA company’s revenue is stable, the higher the composite score of the company’s current income and cumulative income, and the higher the TPA company’s value.

Hypothesis 2 (H2).

When the total amount of accumulated earnings is high, and the persistence of the TPA company’s profits is stable, the higher the composite score of the TPA company’s current and accrued income, and the higher the company’s value in the next period. However, the impact of the combined score of the TPA company’s current revenue and cumulative income on the future company value is weaker than that of the current company value.

2.2. Long-Term TPA Product’s Competitive Strength and Earnings Persistence

According to cumulative causation theory, change in one socio-economic factor will cause change in another socio-economic factor. The transformation of the latter aspect, in turn, strengthens the transformation of the former element and leads the socio-economic process to develop along the direction of the change in the original factor, thus forming a cumulative circular development trend. The role of market forces tends to strengthen rather than weaken the imbalance between regions. Specifically, if a region develops faster than other regions due to its initial advantages, it will grow faster in the future under its existing benefits. This theory has similar application in the evaluation of firm value. The cumulative positive earnings will strengthen the ability to earn more profits. Considering the TPA company’s competitive factors, the impact of the company’s competitive strength on the company’s cash flow risk is not significant. Companies with high competitive strength have the effect of eliminating cash flow fluctuations. On the other hand, if they are in highly competitive industries, the risk of the cash flow of these companies with low, competitive strength is very high because they cannot obtain high-quality market information. In the short term, the advantages of the company’s products correlate to the degree of industry competition. Still, from a long-term perspective, the competitive strength of the products is gradually accumulated, and the accumulation of the past competitive power will enhance the company’s competitive advantage in the future.

Hypothesis 3 (H3).

The stronger the composite score of the TPA company’s long-term product’s competitive strength and product power in the current period, the higher the value of the TPA company in the current period.

Hypothesis 4 (H4).

The stronger the composite score of the TPA company’s long-term product’s competitive strength and product power in the current period, the higher the TPA company’s value in the next period. The composite score of the company’s long-term product’s competitive strength and the TPA company’s product power in the current period has a higher impact on the TPA company’s value in the future than on the company’s value in the current period.

2.3. Long-Term Product’s Competitive Strength, Earnings Persistence, and TPA Firm Value

The case of the products sold by the TPA company is not that the higher the popularity, the higher the sales revenue, because the higher the brand popularity, the higher the corresponding price, and a high price is not acceptable to every customer. If the company can charge higher fees to its customers, the demand for products is increasing instead of reducing, and the company will have product market power [13]. The increase in the product price and company income can reflect the improvement of the brand advantage. If an excessive increase in current income accompanies the progress of brand strength, it signals to investors that the company can build brand quality without sacrificing existing business sales [23].

Differentiation means that the TPA company strives to achieve completely different characteristics from the products of other companies in the industry in all aspects valued by customers. More significant product differentiation may lead to a more inelastic product demand curve, enabling the company’s products to pass on the high cost to customers flexibly. Strong differentiation also brings excellent and lasting competitiveness to the company. Additionally, the company has greater flexibility in dealing with unexpected changes in consumer goods [24]. Many theoretical studies believe that cash reserves have an important influence on providing strategic advantages for companies in the highly competitive product market and increasing the interests of shareholders. The ability of a company that successfully gives the competence of its products depends on the level of internal liquidity. Companies with large amounts of cash can use cash to carry out active product marketing activities and act against competitors, such as decreasing prices, opening up new sales channels, and even acquiring competitors at special prices [25].

Hypothesis 5 (H5).

When the total amount of accumulated profits is high and the persistence of the TPA company’s profits is stable, the higher its current income and accrued income, and the higher its long-term product’s competitive strength and existing product power and current value.

Hypothesis 6 (H6).

When the total amount of accumulated profits is high and the persistence of the TPA company’s profits is stable, the higher its current income and accrued income, and the higher its long-term competitive strength and the TPA company’s existing product power and value in the next period. However, the impact on the forthcoming period is not as significant as that of the current period.

3. Research Methods and Data

This paper selected the annual report data of listed companies from 2004 to 2019 and added the profit data from 8 years to provide the variables to measure the cumulative effect. For example, cumulative data from 2004 to 2012, 2005 to 2013..., and 2011 to 2019 provide the data used for regression from 2012 to 2019. The data source was the CSMAR database, excluding special treatment (ST) companies, particular transfer (PT) companies, financial companies, and companies that went on the market for less than 10 years. This study did not select data from more years because the earlier events will have a weaker impact on the present performance.

Table 1. Description of key variables.

Variable Name	Abbreviation	Description
Firm value	TQ	(Stock price at the end of the year × number of shares in circulation + net assets per share × non-tradable shares + total liabilities at the end of the period)/total assets at the end of the period.
Cumulative earnings per share and unit cash	CEPSUC	Total cumulative net profits for the past nine years/(A-share number in circulation × share price at the end of the period)
Cumulative positive earning times	CPET	Total number of cumulative positive earning time for the past nine years. Positive earning time is coded as 1 when the earning in the current year is positive; otherwise, coded as 0.
Lerner index	LI	(Sales—cost of goods sold—general and administrative expense)/sales.
Cumulative Lerner index	CLI	Total cumulative Lerner index value for the past nine years.
TPA company	TPA	Coded as 1 if the company is a TPA company; otherwise, coded as 0.
Earnings per share	EPS	Net profit/A-share number in circulation.
Company size	CS	Natural logarithm of total assets.
Return on assets	ROA	Net profit/total assets.
Return on equity	ROE	Net profit/net assets.
Ratio of intangible assets to total assets	RI	Total intangible assets/total assets.
Growth rate of operating revenue	GROR	(Total revenue—total revenue in the previous period)/total revenue in the previous period.
Book to market ratio	BMR	Net assets per share / closing price at the end of the year.
Cash flow per share	CFPS	Cash flow from operating activities/number of ordinary shares in circulation.
Debt ratio	DR	Total liabilities/total assets.
Retained earnings ratio	RER	(Retained earnings per share)/net assets per share.
Annual dummy variable	YEAR	Coded as 1 when the company is in the current Year; otherwise coded as 0.
Industry dummy variable	IND	Coded as 1 if the company is in the industry; otherwise coded as 0.

shows the calculation formula of the data.

3.1. Independent Variables

3.1.1. Firm Value

There are many ways to measure the company’s value, including ROA, ROE, EPS, the sustainable growth rate, cumulative excess earnings CAR, and Tobin’s Q [26,27,28,29,30,31,32,33,34], and there are many different ways to calculate Tobin’s Q [29,30,31,32,33]. Table 1 shows the equation used in this paper.

3.1.2. Company Earnings

The second dependent variable is the company’s earnings in the next period. Therefore, Earnings_t+1 represents earnings per share in the next period [35,36,37,38,39,40,41,42]. This paper uses EPS_t+1 to measure the company’s profits, and Table 1 shows the calculation method.

3.2. Dependent Variables of Earnings Persistence

3.2.1. Earnings Persistence

This paper uses the least square linear regression model to measure the earnings persistence of the company with the cumulative earnings per unit cash (CEPSUC) as the variable. The calculation equation of this variable is the ratio of the sum of accumulated profits in the past nine years to the product of outstanding shares and the company’s closing price at the end of the year. The sum of the accumulated net profits over the preceding nine years represents the total value of the accumulated net profits. However, it is impossible to compare due to the different number of outstanding shares in each company. Therefore, no matter how the number of tradable shares changes within nine years, the number of tradable shares at the end of the period will be comparable, so this paper used the current number of shares to calculate the cumulative earnings per share.

Nevertheless, due to the difference in the stock price per share, the cumulative earnings per share are divided by the company’s share price. This calculation means that a single unit of cash invested represents the holding value of the company’s nine-year cumulative income. The reason for choosing nine years is that the continuous-time and the number of comparable samples selected under this period are the most balanced.

3.2.2. Earnings Volatility

This paper mainly uses the variable CPET of cumulative positive earning times to measure the volatility of company profits. Companies with short cumulative positive earning times (CPET) and significant cumulative earnings per unit cash (CEPSUC) show that the volatility of profits is relatively intense. Although the number of positive gains times is large, it is unstable. This paper calculates the score based on the profit data of the company from 2004 to 2019 to measure the amount of cumulative positive profits for nine years, starting nine years before 2012. If the net profit of that year is positive, the profit score is 1. If the net profit of that year is negative, the profit score is 0. Finally, by adding the scores of the previous nine years, the current cumulative profit score is obtained, with the highest total score of 9 and the lowest total score of 4. Stable and volatile persistence have different degrees of determination on the company’s value. Suppose a steady industry positively impacts on the company’s value under the condition of solid product pricing ability. In this case, it shows that the company is likely to rely on a long-term product strategy to increase its value, and the long-term strength of the product is very reliable. When the company has strong pricing power, the impact of volatile persistence on the company’s value is positive, but the slope is relatively low. The reason is that a company with volatile earnings persistence is not likely to rely on its main products to implement the long-term growth strategy but tends to change its main products and services according to market changes.

3.3. Dependent Variables of Product’s Competitive Strength

3.3.1. Product’s Competitive Strength

For the measurement of product advantage, according to the practice of [43], this paper uses the Herfindal index to measure the competition degree of companies in the industry. In addition, this paper uses the Lerner index (LI) to estimate the market pricing power of listed companies’ products in the current period. However, because the data used in this paper is the cumulative value of the past nine years, many companies may change to different industries during this period. Hence, the article does not consider the degree of competition in the industry.

3.3.2. Long-Term Product’s Competitive Strength

This paper uses the cumulative Lerner index, CLI, to measure the company’s long-term product competitive strength. The calculation method of the cumulative Lerner index is to sum up the company’s Lerner index every year and finally obtain an incremental value. This cumulative value represents the company’s overall accumulated product competitiveness over time. The higher the CLI the company has, the longer the product’s competitive strength. However, the problem with this variable in measuring the company’s long-term product’s competitive strength is that the early Lerner index may be relatively high. Still, the recent Lerner index may be relatively low. Therefore, the cumulative value of CLI may represent that the company’s product’s competitive strength in the initial stage of the past nine years is powerful. Still, the advantage has become very weak in recent years. Therefore, to solve this problem, this paper uses the product of the cumulative Lerner index and Lerner index CLI × LI to measure the company’s long-term and recent competitive strength. The company with a high cumulative Lerner index and current Lerner index has the most vital long-term product competitive power.

3.4. Control Variables

This paper calculates the logarithm of the total assets at the year-end to measure the company’s scale. As a result, this paper controls the company’s asset scale, ROA, ROE, a ratio of intangible assets to total assets, a growth rate of sales revenue, a ratio of the market value of equity to the book value of net assets, cash flow per share, asset-liability ratio, retained earnings ratio, industry effect, and annual effect [44,45,46,47,48,49,50,51,52,53,54,55,56,57,58,59,60].

3.5. Model Specification

To test the above H1 and H2, this paper adopts the following regression model:

TQ_t = β₀ + β₁CEPSPUC_t + β₂APET_t + β₃CEPSPUC_t × ROA_t + β₄TPA + β₅Control_t + ξ_t

(1)

TQ_t+1 = β₀ + β₁CEPSPUC_t + β₂APET_t + β₃CEPSPUC_t × ROA_t + β₄TPA + β₅Control_t + ξ_t

(2)

where TQ_t represents the firm value of the current period, TQ_t+1 represents the firm value of the current period, CEPSPUC_t represents the ratio of the cumulative 9-year earnings and the current ending market value of the company in the past 9-year period, APET_t represents the cumulative number of positive profit years, CEPSPUC_t × ROA_t represents the mutual effect of CEPSPUC_t and ROA_t, Control_t represents the control variables in the current year, and ξ_t is the residual regression term of the current period. β₀ is a constant term, β₁ is the estimated coefficient of variable CEPSPUC_t, β₂ is the estimated coefficient of variable APET_t, β₃ is the estimated coefficient of variable CEPSPUC_t × ROA_t, β₄ is the estimated coefficient of variable TPA, and β5 is the control variables’ estimated coefficient.

The following regression models are used to test H3 and H4:

EPSt = β0 + β1LIt + β2CLIt + β3CLIt × ROAt + β₄TPA + β5Controlt + ξt

(3)

EPSt = β0 + β1LIt + β2CLIt + β3CLIt × LIt + β₄TPA + β5Controlt + ξt

(4)

EPSt+1 = β0 + β1LIt + β2CLIt + β3CLIt × ROAt + β₄TPA + β5Controlt + ξt

(5)

EPSt+1 = β0 + β1LIt + β2CLIt + β3CLIt × LIt + β₄TPA + β5Controlt + ξt

(6)

where EPS_t represents the company’s earnings in the current period, EPS_t+1 represents the company’s earnings in the next period, LI_t represents the company’s product power in the current period, CLI_t represents the company’s accumulated product’s competitiveness, CLI_t × ROA_t represents the mutual effect of CLI_t and ROA_t, Control_t represents the control variables, and ξ_t is the regression residual term of the current period. β₀ is a constant term, β₁ is the estimated coefficient of variable LI_t, β₂ is the estimated coefficient of variable CLIt, β₃ is the estimation coefficient of variable CLIt × ROAt, β₄ is the estimated coefficient of variable TPA, β5 is the control variable’s estimation coefficient, and ξ_t is the residual regression term.

To test H5 and H6, the regression model combines Formulas (1) and (2), as follows:

TQ_t = β₀ + β₁LI_t + β₂CLI_t + β₃CLI_t × ROA_t + β₄TPA + β₅Control_t + ξ_t

(7)

TQ_t = β₀ + β₁LI_t + β₂CLI_t + β₃CLI_t × LI_t + β₄TPA + β₅Control_t + ξ_t

(8)

TQ_t+1 = β₀ + β₁LI_t + β₂CLI_t + β₃CLI_t × ROA_t + β₄TPA + β₅Control_t + ξ_t

(9)

TQ_t+1 = β₀ + β₁LI_t + β₂CLI_t + β₃CLI_t × LI_t + β₄TPA + β₅Control_t + ξ_t

(10)

where TQ_t represents the firm value in the current period, TQ_t+1 represents the firm value in the next period, LI_t represents the company’s product power in the current period, CLI_t represents the company’s accumulated product’s competitiveness, CLI_t × LI_t represents the mutual effect of CLI_t and LI_t, Control_t represents the control variables, and ξ_t is the regression residual term of the current period. β₀ is a constant term, β₁ is the estimated coefficient of variable LI_t, β₂ is the estimated coefficient of variable CLI_t, β₃ is the estimation coefficient of variable CLI_t × LI_t, β₄ is the estimated coefficient of variable TPA, β5 is the control variable’s estimation coefficient, and ξ_t is the regression residual term.

4. Results

4.1. Descriptive Statistics

Table 2. Descriptive statistics.

Variable	Obs	Mean	Std.Dev.	Min	Max
TQt	8488	2.051	1.666	0.834	9.915
TQt+1	8488	2.054	1.717	0.831	10.150
EPSt	8488	0.450	0.803	−1.406	3.426
EPSt+1	8488	0.444	0.823	−1.460	3.455
CEPSUC	8488	0.140	0.214	−0.333	0.812
CPET	8488	7.858	1.465	4	9
LI	8288	0.089	0.160	−0.516	0.481
CLI	8488	0.441	2.765	−14.070	4.393
ROA	8488	0.025	0.059	−0.227	0.159
CEPSUC × ROA	8488	0.005	0.012	−0.031	0.044
CLI × LI	8288	0.102	0.598	−2.649	2.078
CLI × ROA	8488	0.020	0.149	−0.688	0.431
TPA	8488	0.586	0.493	0	1
ROE	8488	0.049	0.151	−0.713	0.367
RI	8426	0.048	0.059	0	0.302
CS	8488	22.660	1.423	19.080	26.450
GROR	8482	0.151	0.517	−0.609	2.791
BMR	8488	0.524	0.374	0	2.012
CFPS	8488	0.593	1.287	−2.488	5.272
DR	8488	0.516	0.207	0.099	0.945
RER	8488	0.104	0.983	−6.228	0.817

gives the descriptive statistics of all variables used in this paper, including the observation value, mean value, standard deviation, minimum value, and maximum value. In the sample data, the maximum values of CEPSUC, ROA, and CEPSUC × ROA are 0.811, 0.157, and 0.045, respectively. However, the multiplication of 0.811 and 0.157 is not equal to 0.045. The reason is that this paper winsorized CEPSUC, ROA, and CEPSUC × ROA, respectively, after the calculation of CEPSUC × ROA, not before calculating CEPSUC × ROA. CLI × LI and CLI × ROA both have a similar situation.

Table 3. Pearson correlation matrix.

	TQt	TQt+1	EPSt	EPSt+1	CEPSUC	CPET	LI
TQt	1
TQt+1	0.810 ***	1
EPSt	−0.112 ***	−0.108 ***	1
EPSt+1	−0.051 ***	−0.090 ***	0.705 ***	1
CEPSUC	−0.363 ***	−0.334 ***	0.121 ***	0.124 ***	1
CPET	−0.295 ***	−0.271 ***	0.125 ***	0.138 ***	0.577 ***	1
LI	−0.211 ***	−0.189 ***	0.395 ***	0.285 ***	0.133 ***	0.138 ***	1
CLI	−0.179 ***	−0.147 ***	0.047 ***	0.053 ***	0.293 ***	0.473 ***	0.135 ***
ROA	−0.031 ***	−0.034 ***	0.660 ***	0.390 ***	0.064 ***	0.145 ***	0.499 ***
CEPSUC × ROA	−0.088 ***	−0.069 ***	0.405 ***	0.307 ***	0.404 ***	0.230 ***	0.218 ***
CLI × LI	−0.013	−0.012	0.101 ***	0.098 ***	0.175 ***	0.244 ***	0.220 ***
CLI × ROA	−0.007	−0.008	0.214 ***	0.174 ***	0.144 ***	0.264 ***	0.209 ***
TPA	−0.157 ***	−0.161 ***	0.132 ***	0.139 ***	0.150 ***	0.127 ***	0.103 ***
ROE	−0.023 **	−0.043 ***	0.597 ***	0.360 ***	0.034 ***	0.091 ***	0.386 ***
RI	0.051 ***	0.051 ***	−0.059 ***	−0.054 ***	−0.009	−0.031 ***	−0.027 **
CS	−0.586 ***	−0.553 ***	0.349 ***	0.291 ***	0.415 ***	0.326 ***	0.305 ***
GROR	−0.007	−0.025 **	0.206 ***	0.166 ***	−0.106 ***	−0.117 ***	0.174 ***
BMR	−0.542 ***	−0.487 ***	0.105 ***	0.032 ***	0.496 ***	0.234 ***	0.157 ***
CFPS	−0.121 ***	−0.105 ***	0.476 ***	0.425 ***	0.186 ***	0.121 ***	0.202 ***
DR	−0.225 ***	−0.202 ***	−0.085 ***	−0.025 **	0.042 ***	−0.023 **	−0.091 ***
RER	−0.422 ***	−0.405 ***	0.251 ***	0.212 ***	0.313 ***	0.379 ***	0.318 ***
	CLI	ROA	CEPSUC × ROA	CLI × LI	CLI × ROA	TPA	ROE
TQt
TQt+1
EPSt
EPSt+1
CEPSUC
CPET
LI
CLI	1
ROA	0.078 ***	1
CEPSUC × ROA	0.167 ***	0.310 ***	1
CLI × LI	0.620 ***	0.112 ***	0.236 ***	1
CLI × ROA	0.583 ***	0.269 ***	0.406 ***	0.684 ***	1
TPA	0.113 ***	0.112 ***	0.086 ***	0.097 ***	0.093 ***	1
ROE	0.039 ***	0.781 ***	0.273 ***	0.078 ***	0.178 ***	0.083 ***	1
RI	−0.011	−0.048 ***	0.044 ***	0.025 **	0.016	0.021 **	−0.037 ***
CS	0.192 ***	0.137 ***	0.166 ***	0.115 ***	0.110 ***	0.288 ***	0.150 ***
GROR	−0.108 ***	0.164 ***	−0.020 *	−0.074 ***	−0.059 ***	0.002	0.158 ***
BMR	0.126 ***	0.022 **	0.155 ***	0.049 ***	0.026 **	0.140 ***	0.031***
CFPS	0.072 ***	0.245 ***	0.235 ***	0.066 ***	0.113 ***	0.128 ***	0.215 ***
DR	−0.007	−0.325 ***	−0.138 ***	−0.035 ***	−0.132 ***	0.015	−0.110 ***
RER	0.192 ***	0.290 ***	0.179 ***	0.056 ***	0.130 ***	0.135 ***	0.336 ***
	RI	CS	GROR	BMR	CFPS	DR	RER
TQt
TQt+1
EPSt
EPSt+1
CEPSUC
CPET
LI
CLI
ROA
CEPSUC × ROA
CLI × LI
CLI × ROA
TPA
ROE
RI	1
CS	−0.080 ***	1
GROR	−0.021 *	0.053 ***	1
BMR	−0.027 **	0.572 ***	−0.032 ***	1
CFPS	0.040 ***	0.281 ***	0.073 ***	0.132 ***	1
DR	−0.073 ***	0.366 ***	0.023 **	0.107 ***	0.020 *	1
RER	−0.041 ***	0.352 ***	0.016	0.268 ***	0.145 ***	−0.203 ***	1

*** represents p < 0.01; ** represents p < 0.05; and * represents p < 0.1.

shows the results of the Pearson correlation analysis of variables. It shows the correlation test results between the variables in the model. The variance expansion factor tests whether there is multicollinearity between variables. The results show that the VIF values are less than 10.

4.2. Regression Results

Table 4. Earnings persistence and firm value.

	Earnings Persistence and Firm Value for the Current Period			Earnings Persistence and Firm Value for the Next Period
	TQt			TQt+1
Variables	(1)	(2)	(3)	(4)	(5)	(6)
CEPSUC		−0.006	0.170		−0.186 *	−0.0833
		(−0.08)	(1.88)		(−2.10)	(−0.83)
CPET	−0.037 ***		−0.046 ***	−0.032 **		−0.027 *
	(−3.69)		(−4.14)	(−2.91)		(−2.18)
ROA	−2.151 ***	−2.250 ***	−2.114 ***	−1.375 **	−1.472 ***	−1.393 **
	(−5.58)	(−5.84)	(−5.48)	(−3.22)	(−3.46)	(−3.26)
CEPROA	5.997 ***	5.400 ***	5.262 ***	5.413 ***	5.852 ***	5.772 ***
	(5.06)	(4.33)	(4.22)	(4.13)	(4.24)	(4.18)
TPA	0.050	0.049	0.049	−0.019	−0.018	−0.018
	(1.85)	(1.80)	(1.79)	(−0.62)	(−0.59)	(−0.60)
ROE	1.929 ***	1.978 ***	1.946 ***	1.359 ***	1.369 ***	1.351 ***
	(13.67)	(14.00)	(13.77)	(8.70)	(8.77)	(8.64)
RI	0.508 *	0.545 *	0.541 *	0.418	0.403	0.401
	(2.08)	(2.23)	(2.22)	(1.55)	(1.49)	(1.48)
CS	−0.433 ***	−0.441 ***	−0.434 ***	−0.383 ***	−0.387 ***	−0.383 ***
	(−28.43)	(−29.15)	(−28.49)	(−22.77)	(−23.12)	(−22.71)
GROR	−0.082 ***	−0.070 **	−0.080 **	−0.081 **	−0.076 **	−0.082 **
	(−3.31)	(−2.85)	(−3.23)	(−2.97)	(−2.80)	(−3.00)
BMR	−0.849 ***	−0.851 ***	−0.880 ***	−0.846 ***	−0.814 ***	−0.831 ***
	(−17.58)	(−16.84)	(−17.27)	(−15.82)	(−14.57)	(−14.74)
CFPS	0.047 ***	0.047 ***	0.046 ***	0.059 ***	0.061 ***	0.060 ***
	(4.45)	(4.48)	(4.32)	(5.05)	(5.17)	(5.09)
DR	−0.889 ***	−0.892 ***	−0.890 ***	−0.895 ***	−0.895 ***	−0.894 ***
	(−10.25)	(−10.28)	(−10.27)	(−9.33)	(−9.33)	(−9.32)
RER	−0.484 ***	−0.500 ***	−0.486 ***	−0.492 ***	−0.499 ***	−0.491 ***
	(−29.10)	(−30.60)	(−29.17)	(−26.77)	(−27.66)	(−26.66)
_cons	12.690 ***	12.590 ***	12.780 ***	11.810 ***	11.660 ***	11.770 ***
	(38.75)	(38.35)	(38.59)	(32.61)	(32.10)	(32.10)
N	8420	8420	8420	8420	8420	8420
Year effects	Yes	Yes	Yes	Yes	Yes	Yes
Industry effects	Yes	Yes	Yes	Yes	Yes	Yes
Adjusted R-squared	0.5377	0.5369	0.5378	0.4752	0.4750	0.4752

*** represents p < 0.01; ** represents p < 0.05; and * represents p < 0.1.

lists the results of Formulas (1) and (2) and compares the company value regression results in the current and subsequent periods. This paper uses three regression models of Formulas (1) and (2) to test the direct impact of cumulative net profits and current profitability on current and future TPA company value under the control of CEPSUC and CPET. Whether controlling CEPSUC and CPET, respectively, or controlling CEPSUC and CPET simultaneously, the positive correlation between cumulative net profits and current profitability on the TPA company’s value is not solid. Furthermore, it is not consistent with hypotheses 1 and 2, indicating that the higher the incremental net profits and current profitability, the higher the present value of the company in the current period and the next period. The TPA factor does not strengthen this correlation.

From columns 1 to 3 of Table 4, we can see that the cumulative net profits and the return on total assets of the TPA company have no significant impact on the company’s current value separately. However, let us consider the companies with high cumulative net profits and return on total assets. The effect on the company’s present value is very significant, and the slope is high. The impact of a company’s cumulative net profits on the current company’s value is conspicuous, especially when the recent return on total assets is high and the influence of the incremental net profit on the company’s value is significant. The slope is high, indicating that the company has accumulated more net profit in the previous period. The company’s recent performance causes this accumulation, and it will have a significant positive impact on the current company value. This is always the truth regardless of whether these companies are TPA companies. We can see from column 1 that if we do not control the market value, the negative correlation between the number of positive cumulative earning times and the company’s value is significant. Still, the slope is shallow, which shows that the volatility of the company’s earnings has little impact on the company’s value. In other words, companies with high value do not have to make yearly profits. As long as they make higher profits in some years, they can increase the company’s value instead of making profits continuously for many years, and the annual profit margin is meager. The TPA score slope is 0.050 and is not significant. As can be seen from the second column, under the condition of controlling the cumulative earnings, the company with high incremental net profits and high return on total assets in the current period has a positive impact on the value of the company in the current period. The TPA score slope is 0.049 and is not significant. As we can see from the third column, after controlling the cumulative positive profit times, the incremental net profits, and cumulative income of the market value, the significance and slope of the impact of the cumulative net profits and return on total assets of the market value on the company’s value change little. It once again shows that regardless of whether the company keeps making profits every year or not, the impact on the current value is minimal. The TPA score slope is 0.049 and is not significant.

From columns 4 to 6, we can see that when the cumulative profit of the company and the return on total assets in the current period are very high, it will still have a high positive correlation impact on the value of the company in the next period. The reason is mainly that the cumulative net profits are an incremental value. Suppose the recent company performance improvement causes the increase in this cumulative value. In this case, this advantage will continue to the next stage, and even the slope of this positive impact may be higher than the impact on the company’s value in the current period. The adjusted R-squared value between the models of the company’s cumulative profits on the value of the company in the present and the next term changed. It decreased from 0.5383 in column 1 to 0.4762 in column 4, slightly declining. Therefore, the reliability of these models is relatively high. From the composite view of columns 1–3 and 4−6, if we separately consider the relationship between the company’s cumulative profits and the company’s value without the current performance, the coefficient is insignificant, and the slope is almost zero. The reason is mainly that the variable of cumulative profits does not show the peak profit value over a while. Hence, the relationship between the company’s value in the current and subsequent periods is insignificant. Separately considering the relationship between the return on total assets and the company value, it is likely to be an outlier of the distribution of ROA for some time, so this coefficient cannot reflect a large and significant impact. However, after combining these two, when considering these samples with a high yield distribution in a period and a peak value in the recent period, there will be a significant positive correlation between the current period and the next. The TPA score slopes are −0.019, −0.018, and −0.018, respectively, and are not significant.

Table 5. Long-term product’s competitive strength, earnings persistence, and firm value.

	Long-Term Product’s Competitive Strength and Earnings Persistence				Product’s Competitive Strength and Firm Value
	EPSt	EPSt+1	EPSt	EPSt+1	TQt	TQt+1	TQt	TQt+1
Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
LI	−0.038	0.169**	−0.058	0.140 *	−0.676 ***	−0.513 ***	−0.798 ***	−0.593 ***
	(−0.82)	(2.71)	(−1.26)	(2.22)	(−6.49)	(−4.42)	(−7.63)	(−5.09)
CLI	−0.017 ***	−0.016 ***	−0.015 ***	−0.013 ***	−0.040 ***	−0.021 **	−0.046 ***	−0.025 ***
	(−6.40)	(−4.39)	(−5.53)	(−3.53)	(−6.75)	(−3.23)	(−7.58)	(−3.73)
CLIROA	0.270 ***	0.393 ***			1.090 ***	0.726 ***
	(5.60)	(5.98)			(9.96)	(5.95)
CLILI			0.049 ***	0.071 ***			0.301 ***	0.200 ***
			(4.01)	(4.24)			(10.83)	(6.45)
TPA	−0.021	0.045 **	−0.022	0.044 **	0.051	−0.018	0.043	−0.023
	(−1.76)	(2.80)	(−1.84)	(2.71)	(1.89)	(−0.60)	(1.60)	(−0.77)
ROA	5.072 ***	1.356 ***	5.237 ***	1.595 ***	−1.563 ***	−1.009 *	−0.878 *	−0.552
	(28.12)	(5.52)	(29.35)	(6.56)	(−3.82)	(−2.21)	(−2.17)	(−1.22)
ROE	1.003 ***	0.585 ***	0.987 ***	0.562 ***	1.861 ***	1.352 ***	1.774 ***	1.294 ***
	(16.24)	(6.95)	(15.95)	(6.66)	(13.28)	(8.65)	(12.66)	(8.28)
RI	−0.272 *	−0.488 ***	−0.257 *	−0.466 **	0.594 *	0.561 *	0.604 *	0.568 *
	(−2.51)	(−3.30)	(−2.37)	(−3.15)	(2.41)	(2.04)	(2.46)	(2.07)
CS	0.181 ***	0.178 ***	0.182 ***	0.179 ***	−0.424 ***	−0.379 ***	−0.421 ***	−0.377 ***
	(26.89)	(19.39)	(27.06)	(19.57)	(−27.75)	(−22.28)	(−27.62)	(−22.20)
GROR	0.111 ***	0.123 ***	0.110 ***	0.122 ***	−0.044	−0.0501	−0.043	−0.049
	(10.09)	(8.19)	(10.02)	(8.12)	(−1.77)	(−1.80)	(−1.71)	(−1.76)
BMR	−0.210 ***	−0.431 ***	−0.215 ***	−0.437 ***	−0.835 ***	−0.847 ***	−0.844 ***	−0.852 ***
	(−9.81)	(−14.75)	(−10.03)	(−14.98)	(−17.17)	(−15.62)	(−17.39)	(−15.75)
CFPS	0.189 ***	0.206 ***	0.190 ***	0.207 ***	0.055 ***	0.072 ***	0.056 ***	0.072 ***
	(40.07)	(31.97)	(40.12)	(32.03)	(5.17)	(5.99)	(5.27)	(6.05)
DR	−0.296 ***	−0.334 ***	−0.303 ***	−0.344 ***	−0.817 ***	−0.841 ***	−0.822 ***	−0.845 ***
	(−7.77)	(−6.44)	(−7.95)	(−6.64)	(−9.46)	(−8.74)	(−9.54)	(−8.79)
RER	−0.054 ***	0.007	−0.053 ***	0.009	−0.445 ***	−0.456 ***	−0.432 ***	−0.448 ***
	(−7.44)	(0.73)	(−7.23)	(0.87)	(−26.93)	(−24.76)	(−25.97)	(−24.12)
_cons	−3.629 ***	−3.463 ***	−3.652 ***	−3.498 ***	12.200 ***	11.470 ***	12.130 ***	11.430 ***
	(−24.93)	(−17.46)	(−25.09)	(−17.62)	(36.94)	(31.15)	(36.80)	(31.06)
N	8227	8227	8227	8227	8227	8227	8227	8227
Year effects	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Industry effects	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Adjusted R-squared	0.6383	0.3626	0.6376	0.3612	0.5345	0.4668	0.5356	0.4672

*** represents p < 0.01; ** represents p < 0.05; and * represents p < 0.1.

lists the results of Formulas (3)–(10), compares the EPS regression results in the current and next period, and compares the TPA company value regression results in the present and subsequent period.

According to the comparison between column 1 and column 2 of Table 5, the long-term competitive strength of the product has a remarkable positive influence on the company’s current earnings per share, but the slope is not very high. The long-term competitive power of the company product still has a significant positive correlation with the company’s earnings per share in the next year, and the slope becomes more extensive. It shows that the long-term competitive strength of the product has a significant positive correlation with the company’s earnings persistence. However, the adjusted R-squared value of the equation in the second column is nearly twice as low as that in the first column. Therefore, it is essential to conduct further research on the procedure in the second column and add more critical variables. The TPA score in column 2 becomes 5% significant compared to column 1, which means that the TPA score will strengthen the companies’ ability of earning profits in the next term. The situation is similar in column 3 and 4.

Nevertheless, the significant positive relationship between the product’s long-term competitive strength and earnings persistence is particular. From column 2 to column 3, we can see the single long-term product’s competitive power without considering the return on total assets of the company in that year, even if the product’s competitiveness of that year is extreme. The cumulative long-term product cost-competitive advantage has a relatively weak impact on the company’s current net profit per share. Additionally, it has a minimal influence on the net profit per share of the company in the next period. Therefore, if we do not consider the return on total assets of the company in that year, the long-term competitive strength of the product has no significant impact on the company’s earnings persistence. From columns 5 to 6, we can see that the positive effect of a long-term product’s competitive advantage on the company’s current value is more significant than that on the company’s value in the next period. Separately, the impact of the product’s long-term competitiveness on the firm’s value and the effect of the firm’s current ROA on the firm’s value is negative, and the slope is tiny. However, when these two variables are combined, the impact on the firm’s value is very significant, and the gradient is also very high. The reason is that considering the long-term product’s competitiveness alone does not determine whether the competitiveness belongs to the early stage or the near future. Considering ROA alone does not determine whether ROA is accidental or long term. From columns 7 to 8, we can see that after controlling the long-term product’s competitive strength, the significance and slope of the impact of the company’s earnings persistence on the company’s value in the current period are reduced simultaneously. Combined with the conclusions in Table 4, this shows that the impact of the company’s earnings persistence on the company’s value is significant. When the long-term product’s competitive strength exists, the positive effect of corporate earnings persistence on the corporate matter is also positively affected by the product’s long-term competitive stability. The effect of the product’s long-term competitive strength on corporate value is also tremendous, which is a significant positive correlation. From column 5 to column 8, the TPA score has an insignificant impact on the companies’ value. Generally speaking, the effect of earnings persistence reflected by the firm’s long-term cumulative profits on the firm’s value and the impact of the product’s long-term competitive advantage on the firm’s value is the most important, especially when the current performance is relatively high.

4.3. Robustness Test

To further verify the research results on the correlation between cumulative profit, long-term product competitiveness, and company value, this paper uses the company’s market value at the end of the year to test the above hypothesis. CMV_t represents the company’s total market value at the end of the current period, and the calculation equation is CMV_t = ln (year-end stock price × number of circulating shares), and the adjusted R-squared value increases considerably. We obtained similar regression results as before, as shown in

Table 6. Long-term competitive advantage, earnings persistence, and company market value.

	Earnings Persistence and Company Market Value		Long-Term Competitive Advantage and Company Market Value
	CMVt	CMVt+1	CMVt	CMVt+1	CMVt	CMVt+1
Variables	(1)	(2)	(3)	(4)	(5)	(6)
CEPSUC	−0.268 ***	−0.247 ***
	(−7.41)	(−6.15)
CPET	0.043 ***	0.033 ***
	(9.67)	(6.72)
ROA	0.0272	0.394 *	0.291	0.518 **	0.584 ***	0.775 ***
	(0.18)	(2.31)	(1.80)	(2.86)	(3.64)	(4.32)
LI			−0.222 ***	−0.115 *	−0.265 ***	−0.153 ***
			(−5.39)	(−2.49)	(−6.38)	(−3.29)
CLI			0.001	−0.001	0.002	−0.001
			(0.54)	(−0.45)	(0.87)	(−0.27)
CLIROA			0.474 ***	0.416 ***
			(10.94)	(8.57)
CLILI					0.104 ***	0.093 ***
					(9.41)	(7.55)
CEPROA	4.472 ***	4.005 ***
	(8.99)	(7.26)
TPA	0.018	0.026 *	0.015	0.023	0.013	0.020
	(1.69)	(2.14)	(1.42)	(1.89)	(1.20)	(1.71)
ROE	0.562 ***	0.573 ***	0.564 ***	0.591 ***	0.531 ***	0.563 ***
	(9.97)	(9.16)	(10.16)	(9.52)	(9.55)	(9.04)
RI	0.241 *	0.218 *	0.280 **	0.258 *	0.298 **	0.272 *
	(2.48)	(2.01)	(2.87)	(2.36)	(3.05)	(2.49)
CS	0.762 ***	0.743 ***	0.768 ***	0.745 ***	0.769 ***	0.746 ***
	(125.62)	(110.32)	(126.95)	(110.10)	(127.11)	(110.31)
GROR	−0.138 ***	−0.109 ***	−0.128 ***	−0.098 ***	−0.128 ***	−0.098 ***
	(−14.05)	(−9.99)	(−12.94)	(−8.81)	(−12.95)	(−8.82)
BMR	−1.091 ***	−0.980 ***	−1.121 ***	−1.008 ***	−1.127 ***	−1.013 ***
	(−53.73)	(−43.51)	(−58.19)	(−46.78)	(−58.49)	(−47.05)
CFPS	−0.026 ***	0.004	−0.020 ***	0.009	−0.019 ***	0.009 *
	(−6.13)	(0.78)	(−4.68)	(1.87)	(−4.54)	(1.98)
DR	−1.491 ***	−1.419 ***	−1.477 ***	−1.402***	−1.485 ***	−1.409 ***
	(−43.15)	(−37.01)	(−43.16)	(−36.64)	(−43.36)	(−36.81)
RER	−0.120 ***	−0.120 ***	−0.103***	−0.107 ***	−0.0993 ***	−0.104 ***
	(−18.16)	(−16.25)	(−15.69)	(−14.64)	(−15.03)	(−14.09)
_cons	6.189 ***	6.673 ***	6.389 ***	6.863 ***	6.352 ***	6.832 ***
	(46.89)	(45.57)	(48.82)	(46.88)	(48.49)	(46.65)
N	8420	8420	8227	8227	8227	8227
Year effects	Yes	Yes	Yes	Yes	Yes	Yes
Industry effects	Yes	Yes	Yes	Yes	Yes	Yes
Adjusted R-squared	0.8034	0.7621	0.8045	0.7590	0.8038	0.7585

*** represents p < 0.01; ** represents p < 0.05; and * represents p < 0.1.

.

5. Conclusions and Discussion

This paper concludes that the TPA company’s long-term competitive advantage mainly comes from two aspects: one is the profitability created by continuous high profits, and the other is the product market competitive advantage. These two long-term competitive advantages ensure the company shows stable, high-quality growth. Long-term persistence can overcome the situation of earnings management and ROE manipulation, which cannot truly reflect the company’s value. When the cumulative value is adopted, the regression results avoid the influence of the annual effect and have a higher degree of accuracy. The most important conclusion of this paper is that the cumulative net profits of the past nine years have a positive correlation with the firm value and have a sustainable influence on the solid matter in the next period. It shows that the higher the accumulative net profits in the past period, the higher the relevant effect on the future profitability and the positive influence on the firm’s net profit in the current period. This relationship still positively impacts the firm’s net profit for the following year. The second important conclusion of this paper is that the TPA company’s long-term product competitiveness significantly influences the firm’s current yield. This impact will continue the following year, and the effect will continue to increase. However, the company’s long-term product competitiveness will not continue to improve the positive relationship between the company’s value in the next year, although the company’s long-term product competitiveness is very significant for the positive correlation between the company’s current and the subsequent periods. This paper applied the cumulative cycle theory to the field of microeconomics, which is a theoretical contribution. There are also different contributions to the company’s stakeholders for investors.

This paper also concludes that there is no apparent advantage in investing in TPA companies. It is necessary to study the company’s competitiveness and cumulative earnings capacity using the traditional method. For creditors, TPA companies have higher credibility than ordinary companies regarding debt repayment responsibility. However, the solvency of TPA companies may not be high enough. For the government, the contribution of this paper is that the TPA company is a responsible and socially responsible company. However, the senior operation ability of these companies is not higher than that of other companies because they are TPA companies. Therefore, the state should support TPA companies and give them preferential policies.

The first disadvantage of this paper is that the selected data time is data from between 2012 and 2019. The reason for choosing eight years is that it is an equilibrium value. The longer the cumulative years, the better. However, too many years reduce the number of samples. Hence, we finally chose an equilibrium value of eight years. This calculation was based on the cumulative data year by year, calculated from the nine years before 2012. Therefore, this paper did not include the companies on the market after 2004 because the data are not balanced and comparable, so the research results can only verify a small part of the samples. In future research, further analysis of the influence of more previous cumulative values may be meaningful. Secondly, this paper used the ratio of incremental net profits over some time to the total stock price of the company in that year as a variable to measure the continuity of the company’s earnings because the company’s stock price is different. It means that the cost of cumulative net profits to obtain these incremental net profits is different; whether this practice can be improved requires further research.