Showing papers on "Earnings published in 1968"

The information content of annual earnings announcements

Abstract: The information content of earnings is an issue of obvious importance and is a focal point for many measurement controversies in accounting. This paper empirically examines the extent to which common stock investors perceive earnings to possess informational value. The study directs its attention to investor reaction to earnings announcements, as reflected in the volume and price movements of common stocks in the weeks surrounding the announcement date. Valuation theory has long posited a relationship between earnings and the value of common stock. Miller and Modigliani postulate that one important element in determining the value of common stock is the product of earnings times the appropriate earnings multiplier for that risk class.' Graham, Dodd, and Cottle take a similar position with respect to the computation of their "intrinsic value" of common stock securities.2 MM also provide empirical evidence that suggests if reported earnings are adjusted for measurement errors through the use of instrumental variables, the adjusted earnings are useful in the prediction of the market value of electric utility firms. In fact, the evidence indicated that the earnings term was the most important explanatory variable in the valuation equation.3 The relationship is a necessary condition for earnings to have information content,

The consensus and accuracy of some predictions of the growth of corporate earnings

Abstract: FOR YEARS ECONOMISTS HAVE EMPHASIZED the importance of expectations in a variety of problems.' The extent of agreement on the significance of expectations is almost matched, however, by the paucity of data that can be considered even reasonable proxies for these forecasts. One area in which expectations are highly important is the valuation of the common stock of a corporation. The price of a share is-or should be-determined primarily by investors' current expectations about the future values of variables that measure the relevant aspects of corporations' performance and profitability, particularly the anticipated growth rate of earnings per share.2 This theoretical emphasis is matched by efforts in the financial community where security analysts spend considerable effort in forecasting the future earnings of companies they study. These forecasts are of particular interest because one can observe divergence of opinion among different individuals dealing with the same quantities. This paper is devoted to the analysis of a small sample of such predictions and certain related variables obtained from financial houses.'

The General Agreement on Tariffs and Trade

Abstract: Among the features that distinguish the General Agreement on Tariffs and Trade (GAIT) from other international organizations concerned with the trade of less developed countries are two that are especially significant. GATT is the only interregional organization in which the undertakings by members take the form of contractual commitments. It is also an organization that is concerned with trade not only between developed and less developed countries but within these two groups as well. The question can be raised, however, as to whether an organization so constituted and oriented is suited to the task of facilitating the export earnings of the less developed countries or whether, on the contrary, a more specialized body, devoted exclusively to that task, is likely to achieve better results.

Price Ratios in Relation to Investment Results

Abstract: Long association with investment managers, committees, and analysts leads to the observation that they are principally guided by various combinations of four investment philosophies. I designate these as "blue chip", "growth", "price trend" and "present value". Each has been the basis of successful investment and, at times, each has been related to mediocre or poor results. "Blue chip" investors look for strong industry leaders of acknowledged quality. Often, but not always, they pay premium prices for quality, which is their basis for expecting continuation of past successes. Adverse reversals in earnings and prices which may occur from time to time are expected to be temporary and unimportant. "Growth" investors predict future growth or, often, accept the predictions of others. They compare relative rates of growth and, in buying stocks with the higher earnings expectations, they are willing to pay now for future values. Their confidence in the possibilities of substantial profits makes them ready to accept the dual risks that anticipated growth will not occur and that high current stock prices may reflect too much of the expected growth. "Price trend" investors look with favor on shares that have already displayed an uptrend in price and they look with disfavor on those which are static or which have trended downward. They can point to evidence that existing trends frequently continue for a considerable time. This does not always happen, however, and all price-trend investors are not adept in foreseeing eventual price reversals. Sophisticated techniques are sometimes employed to forecast such reversals. "Present value" investors believe that a bird in hand is worth two in the bush. They prefer investments which appear to give full or nearly full value in the present in addition to what may come in the future. They generally look for high near term earnings and may find a basis for further confidence in observing that dividends, depreciation charges, sales, assets or other figures appear substantial in relation to stock prices. They are inclined to be impressed with the possibilities of the cheaper and less popular stocks and to accept the risk that the market may be right in predicting an unpretentious outlook for these stocks. There is a perennial conflict of opinion or at least a conflict of emphasis between those who emphasize the importance of favorable price relationships and other investors who give less attention to present figures and who confidently pay liberal prices for quality, for growth prospects or for favorable trends.

Graduate Education, Ability, and Earnings

Abstract: SUBSTANTIAL interest in recent years has centered on the relationship between personal earnings and a myriad of education related variables.' In this paper we present estimates of the impact on earnings of schooling, an index of ability, and a set of other relevant variables for a cohort of recent entrants to the labor market who have had some graduate education in the arts and sciences. Aside from a purely intellectual curiosity, there are several other reasons for investigating the annual earnings for a group of this sort. First, estimates of an earnings function are necessary for calculation of rates of return to various quantities of educational investment. To date, very little work of an economic nature has been done in the growing field of graduate education.2 It is hoped that the estimates presented in this paper may be viewed as an exploratory attempt to come to grips with problems in this important and neglected area. Secondly, we have explicitly attempted the specification of an earnings relationship which allows the differential impact of schooling related variables to depend on the values of other relevant explanatory variables.3 The existence of such interactive effects is interesting in itself and has important implications both for the rate of return analyses already available in the literature and for any further work on graduate education which may be attempted. Finally, there is substantial interest in the specification of an earnings relationship which explicitly attempts to deal with the slippery concept of ability to earn income. We would like to know: (a) What sort of ability index is relevant in the context of highly educated persons, (b) the quantitative importance of an ability index, and (c) how parameter estimates of schooling related variables are changed by the inclusion of an ability variable. We do not hope to provide definitive statements on these issues, but our results should be of some interest to those working on related problems in the economics of education. The plan of the paper is as follows: Section I outlines the nature of the data, variables, and methods used in estimation. Sections II and III present the results of the additive and interactive models. Section IV contains a few concluding remarks.

A Note on the Quality Dimension in Education

Abstract: We report here some evidence of association between the amount a state spends per year on primary and secondary education and the later earnings of people who went through those school systems. The relation remains strong, even after strenuous attempts to eliminate spurious correlation, and can be interpreted as an estimate of the payoff to individuals from added annual expenditures which presumably increase the quality of education. We start with a national probability sample of family heads interviewed early in 1965 and remove most of the effects of the " quantity " of education (years of school completed), and of age, sex, and racial differences, on the hourly earnings of family heads. Then we relate the unexplained residual earnings to the average state and local expenditures on primary and secondary education years ago in the state where each person grew up.1 Most of the microanalysis of the "payoff" to investment in education has used "years completed" as the measure of the amount of education, but only some additional information on the "payoff" to investment in ' more education per year" can answer the question of whether the correct social policy is more years of school or more expenditure per year.2 Macroanalysis can make use of expenditures on education rather than years of school, but only at the expense of aggregation that causes other difficulties. The investment in education includes more than the public expenditures, of course, and the return is more than the increase in earnings. We use hourly earnings rather than annual earnings to assess the potential effect, and if one is interested in social return, it can be argued that differential

Low Price-Earnings Ratios and Industry Relatives

Abstract: (1968). Low Price-Earnings Ratios and Industry Relatives. Financial Analysts Journal: Vol. 24, No. 4, pp. 125-127.

Discussion of The Information Content of Annual Earnings Announcements

Abstract: It is my understanding that the invitation was to comment as an investor on Mr. Beaver's interesting paper and to do so within ten minutes. Here goes. First, I did find Mr. Beaver's paper interesting though I must confess that his well documented findings come as no surprise. "Reported earnings is the name of our game!" I entered this securities business upon leaving the University twenty years ago, and while I have not verified the observation statistically, I am firmly of the opinion that stock prices have become increasingly sensitive to reported earnings. We used to talk about value a lot but this concept has become so foreign that at Jim Lorie's seminar last week we were told that valuation models are a failure. All that counts to the stock market is earnings and a growth rate. I would be quite interested in a study, such as Mr. Beaver's, which tests this observation. I should add that he also suggests such an investigation. Another question that I found I kept asking myself as I read the paper was, "In how many cases are we examining the impact of merely fourth quarter reports on investors' expectations and in how many cases is the annual report the first solid figure the investor has seen for a year?" If I understand the analysis, it establishes that the reactions of both price and volume cluster around the reporting date consistently enough to suggest that whether a company reports quarterly or only annually does not seem to make any difference-but as an investor, I wonder. Another point centers on my not being enough of a statistician to develop any kind of a quantitative feel for the price and volume reac-

A benefit/cost model to evaluate educational programs

Abstract: Essentially, a benefit/cost model provides a procedure to evaluate a project in terms of its economic objectives. The analytic task is to determine the present value of all benefits less the present value of all costs, so that the projects which maximise this difference can be selected. There are private benefits (those appropriated by the persons directly involved in the project), and social benefits (those derived by others because of the project) that should also be taken into account when public policy is involved. Limitations of data preclude us from considering all the benefits, but in the present study of the benefits of an educational program, the following have been incorporated: (1) increases in earnings due to attaining higher levels of education; (2) benefits that accrue to the offspring of the present generation resulting from the influence of the educational attainment of parents on that of their children; and (3) the reduction in juvenile crime. The model that is used to estimate these benefits includes thirteen separate equations. A major ingredient of all of these equations is represented by equation 4 in the model: B p (e)= ∑ n i=0 Vi(e)− ∑ n i=0 Vi(e)Pi(e) According to this equation, the private benefits of additional education are calculated as the difference between the expected economic returns with the program (designated T) and the expected economic returns without the program. Expected economic returns are estimated by the product of lifetime earnings for each level of education (Vi) times the probability distribution of obtaining the various levels of education (Pi), where i designates a level of education. These benefits will be different for individuals with different characteristics, designated ϵ. The parameters of the model have been estimated by the use of Census data for earnings, and various special survey data for the probabilities of educational attainment and committing juvenile crimes. Essentially an educational program changes the probabilities of educational attainment, increasing the probability of graduating from high school and going on to college. In this study, we applied the model to a Title I ESEA, program in San Francisco, California, during 1966–1967. Since the program was implemented in the elementary grades, we used the mathematics of Markov Chains to estimate the probabilities of eventual grade level attainment. We found that prior to the program, about half of the disadvantaged non-Negro males and considerably more than half of the Negro males could be expected to be dropouts. The model showed, however, that a Title I program in San Francisco costing $220 per child sufficiently raised test scores in elementary grades so that the expected dropout rates were reduced about 3 1 2 per cent for non-Negro and 2 1 2 per cent for Negro male pupils.

Determinants of Economic Success in Retraining the Unemployed: The West Virginia Experience

Abstract: The economic costs and benefits of government-sponsored retraining of the long-term unemployed in West Virginia from 1959 through 1964 are examined and analyzed in this study of the post-training labor market experience of 879 Trainees, Nontrainees, and other groups. A multivariate analysis was used. When the effects of age, sex, education, and other socioeconomic and labor market variables were held constant, the net effect of retraining on employment and before-tax earnings for the study sample was shown to be positive and statistically significant. Average monetary benefits exceeded average monetary costs during the 18-month post-training period.

Discussion of The Information Content of Annual Earnings Announcements

Abstract: In Alice in Wonderland, the characters have various and sundry bits of good advice for empirical researchers in accounting. Moreover, the Queen provides excellent advice for thosewho comment on papers by empirical researchers in accounting: "Off with his head." Since a critique is meant to be critical, I will follow that advice. But I want to make clear at the onset that Mr. Beaver's paper is, in my opinion, indeed excellent. My comments should accordingly be taken within this overall frame of reference. Comments on "The Information Content of Annual Earnings Announcements" will be divided into two broad categories. Methodological issues will be described. Broader issues and suggested future research will be discussed.

The Size Distribution of Earnings

Abstract: The purpose of this paper is to develop a theory of the size distribution of earnings or income from work, as distinguished from property income. The theory that is to be sketched is abstract and limited in reference to positions of long-run equilibrium; i.e. it purports to show how earnings would be distributed as various assumptions are made about long-run forces. By long-run forces, we mean those forces that determine relative factor rewards in a neo-classical stationary state or on a balanced growth path.

Market Concentration and Wage Increases: U.S. Manufacturing, 1947–1964

Abstract: Discusses and analyzes the hypothesis that monopolistic or oligopolistic industries provide bigger wage increases than competitive industries. Relationship between annual earnings changes and concentration ratios by industry; Discussion of the slowness in concentrated industries to adjust to demand increases and its relevance to labor demand of monopolists and oligopolists. (Abstract copyright EBSCO.)

The Economic Rationale of Occupational Choice

Abstract: Argues that investing higher education costs in a savings account would result in a higher lifetime return than wages from occupations. Analysis of labor investment and education costs; Role of the family in occupational choice; Description of the labor investment model; Estimation of earnings by type of occupations. (Abstract copyright EBSCO.)

Risk and the Addition of Debt to the Capital Structure

Abstract: This paper investigates how the addition of debt to the capital structure of a corporation affects the risk of the stockholders. In the first instance, we will hold the size of the firm constant and substitute debt for common stock. In the second situation, we will allow firm size to change, and will accomplish the increase in size by issuing debt. For both situations, we will first observe the effect of debt on the earnings per dollar of common stock investment. The analysis could also be made using the number of shares of common stock. Since the number of shares of common stock may be changed quite arbitrarily (as, for example, by stock dividends), we want to make the measure invariant to the number of shares outstanding. We will do this by using value of common stock and value of debt. We are then computing the variance of return on common stock investment when we compute variance of earnings per dollar of common stock investment. After considering how debt affects earnings per dollar of stockholders' investment, we will investigate the effect of debt on the total earnings of the stockholders, and on the probability of a deficit.

The idle cash balances of state and local governments: an economic problem of national concern

Abstract: IN 1961 AND AGAIN IN 1965 the Advisory Commission on Intergovernmental Relations (ACIR) focused attention on the idle cash balances of State and local governments.' The Commission reckoned the aggregate loss (in terms of interest earnings forgone) at $50-100 million per year.2 With State-local expenditures quickly approaching the $100 billion level, a loss of $100 million per year may seem insignificant.3 The main point of this article, however, is that aggregate interest earnings forgone may well exceed $100 million per year and does indeed represent an economic problem of national concern. To determine the magnitude of forgone interest earnings, it is necessary to make an estimate of the excess cash balances of State and local governments. The measurement of excess cash balances requires a comparison between theoretically determined optimal cash balances and empirically estimated actual cash balances. The estimate of potential interest lost is obtained by multiplying the difference between the actual balances and the optimal balances (i.e., the estimated excess cash balances) by the going interest rate on non-risk short-term funds.

Alternative Maximization Policies for Developing-Country Exports of Primary Products

Abstract: In the literature on the international policy problem of increasing the earnings of the developing countries from their exports of primary commodities, it is sometimes asserted and frequently implied that the aim of commodity policy should be to maximize the export earnings of these countries. In a related context, it is sometimes implied that the aim of marketing boards, governmental export restriction schemes, and so forth, should be to maximize the profits obtained from the difference between world and domestic prices. To the international trade theorist, however, the theory of optimum tariffs suggests that the aim should be to maximize the national gain from trade. This paper presents a simple mathematical analysis of these three proposed maximizing strategies.' Let the demand and supply curves, respectively, be

A Negative Income Tax Plan for Maintaining Work Incentives

Abstract: Any subsidy plan for supplementing low incomes tends to reduce labor supply, to the extent leisure is not an inferior good, by raising incomes over what they would be from earnings alone. Under a constant or increasing marginal tax rate subsidy plan, this tendency is reinforced by the fact that as long as a minimum is guaranteed, the marginal income gained from an extra hour's work would be less than that for an hour of earned income. Labor supply would be maintained only by making the marginal income received greater than the amount received from earnings alone. In this article, the author presents a subsidy plan which would tie the tax benefit to the proportion of full schedule worked. He also discusses the shortcomings of the plan and concludes that it is by no means certain that work incentives would be maintained and that the labor supply would not be reduced under such a graduated plan.

Negotiated Wage Increases, 1951-1967

Abstract: T HIS paper analyzes negotiated wage settlements over a 17-year period. The analysis uses annual data for manufacturing as a whole, for individual manufacturing industries, and for building construction as a special case. Various comparisons are made. The wagesettlement series for manufacturing is compared with increases in straight-time average earnings in manufacturing and the unemployment rate in manufacturing; wage settlements are also compared with earnings increases for individual manufacturing industries, suggesting some conclusions with respect to "wage drift" and the wage-price guidelines of the Kennedy and Johnson administrations. Likewise, wage settlements are compared for eleven manufacturing industries and construction, indicating the contrasts among them and the effects of changes in industry wage differentials upon the wage structure. Such comparison raises questions concerning the influences of the wage-price guidelines on negotiated wage increases in various types of industry beginning in 1962. Finally, negotiated increases in building construction are compared with such increases for manufacturing as a whole and with the relative unemployment rate for construction workers, indicating disparate developments and the consequent pressures on wage negotiations in manufacturing, especially the mass production industries.

Evaluation of the Usefulness to Investors of Different Accounting Estimators of Earnings: A Simulation Approach

Abstract: Accounting measures or "estimates" of a firm's earnings over a given interval of time (accounting period) are considered to have informational content to the extent that they signify the progress of the firm over that period. Managements of large firms probably do not rely on these accounting measures as much as they once did because of their increased awareness of the inherent limitations and biases of these measures for decision-making purposes and their access to better information. Nevertheless, the present and prospective stockholders of large firms, especially those who play little or no role in management policy making, still tend to rely heavily on these accounting measures in deciding whether to buy, sell, or hold shares in these firms. The apparent reason is that these "outside" investors have little access to "hard" information about the firm's present and future prospects other than these measures. In view of this situation, a question of significant interest emerges, one which has concerned the accounting discipline for some time, especially in recent years. The question is: Do certain accounting methods generate earnings estimates which are more useful to outside investors than those generated by other accounting methods? Several accountants have some strong opinions concerning this question, but these opinions are only hypotheses, unsupported by evidence or well-knit theory.'

Earnings Growth and Price Change in the Same Time Period

Abstract: FREQUENTLY the most important determinant of the rate of return in equity investments is the rate and direction of price change.' Success in investments, if it not be due to chance, is largely a function of the ability to predict price changes. The importance of predicting price changes has led to a number of studies aimed at discovering the determinants of price change. These studies may be conveniently classified into three groups: first, those studies that sought to predict future price changes from past price changes; second, those investigations that attempted to predict price changes from price ratios, such as the price/ earnings ratio; and third, those studies which sought to predict price changes from past changes in other variables, such as earnings. In the last decade a score of studies were made which attempted to discover whether future price changes could be predicted from past price changes. The results were generally disappointing. It was found that successive price changes tended to be independent; the price change of a stock in one period had little bearing on the price change in the next period. Moreover, the relative price change of a stock (relative to other stocks) in one period was not indicative of the relative price change of that stock in the next period.2 Although the full import of the results of these studies is not yet clear, the studies certainly have important implications for financial analysis. Some have concluded that the results call into question the very utility of fundamental financial analysis.3 This conclusion was certainly premature and may be questioned, as will be shown below. The results of the second and third groups of studies were only partly encouraging. The correlation between price ratios and future price changes, though promising, was frequently neither significant nor positive and price changes in one period tended to be independent of earnings changes in the preceding period.4 None of the studies were devoted to the question of the relation between relative earnings changes and relative price changes in the same period. This question should probably have been examined first. Even though previous e arnings growth was unrelated to present changes in prices, perhaps percentage changes in prices and earnings in the same period were highly correlated. Per share earnings growth could still have a substantial influence on simultaneous price changes. If there were little connection between relative earnings changes and p r i c e changes in the same period, then the ability to predict relative earnings changes might be of limited value. If, on the contrary, there were high correlation between relative earnings changes and relative price changes in the same period, then the ability to predict relative earnings changes would be extremely important.5 The purpose of this article is to report the results of a study of the influence of rates of growth of per share earnings on percentage changes in stock prices in the same period.

Compensation in Union and Nonunion Plants, 1960–1965

Abstract: Examines the differences in earnings and nonwage benefits between union and nonunion workers in manufacturing industries in the United States from 1960 to 1965. Union effect on wages; Comparison of wage increases; Information on the supplementary benefits of workers. (Abstract copyright EBSCO.)

An Empirical Analysis of Risk-Taking by Firms in the Savings and Loan Industry

Abstract: Risk-taking by individual firms is difficult to evaluate empirically because risky actions and their outcomes are not reported in firms’ financial statements. An exception exists in the case of financial institutions which are regulated and insured by Government agencies. These agencies collect detailed information about portfolios, earnings, foreclosures, losses, reserves, and write-offs from individual firms.