Showing papers on "Earnings published in 1993"

Contrarian Investment, Extrapolation, and Risk

Abstract: For many years, stock market analysts have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This paper provides evidence that value strategies yield higher returns because these strategies exploit the mistakes of the typical investor and not because these strategies are fundamentally riskier.

Cross- sectional determinants of analyst ratings of corporate disclosures

Abstract: In this paper we examine cross-sectional variation in analysts' published evaluations of firms' disclosure practices and provide evidence that the analysts' ratings are increasing in firm size and in firm performance as measured by earnings and return variables, decreasing in the correlation between earnings and returns, and higher for firms issuing securities in the current or future period. Results based on the volatility of past performance are mixed. While the SEC's mandatory disclosure requirements provide a basic framework and minimum standard for many financial disclosures, considerable latitude remains in determining what information is actually provided. Some firms' annual and quarterly reports go well beyond the required disclosures, while others are extremely stark. Less formal communication channels, such as press releases and direct contact with analysts, allow even more discretion. This wide range of disclosure alternatives is aggregated by analysts in the Reports of the Financial Analysts

Perceived Auditor Quality and the Earnings Response Coefficient

Abstract: SYNOPSIS AND INTRODUCTION: An auditor's reputation lends credibility to the earnings report that he audits. An unresolved issue is whether auditor size is correlated with auditor quality, where a high-quality auditor is defined as one who brings about more credible earnings reports. According to basic intuition and a modified Holthausen-Verrecchia (1988) model, investors' response to an earnings surprise will depend on the perceived credibility of the earnings report. In this study, we examine whether the earnings response coefficient (ERC) differs between Big Eight (B8) and non-Big Eight (NB8) audited firms. This provides a test of the joint hypotheses that auditor size is a proxy for auditor credibility and of the modified H-V model. Consistent with the joint hypotheses, we find that the ERCs of Big Eight clients are statistically significantly higher than for non-Big Eight clients. The result obtains in both a matched sample of firms paired according to industry membership, and a switch sample of firms grouped according to shifts from and to B8 and NB8 auditors. Furthermore, the result is robust with respect to the inclusion of other explanatory factors for ERC that have been suggested by previous studies: growth and persistence, risk, firm size, and predisclosure information environment.

Using Geographic Variation in College Proximity to Estimate the Return to Schooling

Abstract: A convincing analysis of the causal link between schooling and earnings requires an exogenous source of variation in education outcomes. This paper explores the use of college proximity as an exogenous determinant of schooling. Analysis of the NLS Young Men Cohort reveals that men who grew up in local labor markets with a nearby college have significantly higher education and earnings than other men. The education and earnings gains are concentrated among men with poorly-educated parents -- men who would otherwise stop schooling at relatively low levels. When college proximity is taken as an exogenous determinant of schooling the implied instrumental variables estimates of the return to schooling are 25-60% higher than conventional ordinary least squares estimates. Since the effect of a nearby college on schooling attainment varies by family background it is possible to test whether college proximity is a legitimately exogenous determinant of schooling. The results affirm that marginal returns to education among children of less-educated parents are as high and perhaps much higher than the rates of return estimated by conventional methods.

How Computers Have Changed the Wage Structure: Evidence from Microdata, 1984–1989

Abstract: This paper uses Current Population Survey data to examine whether workers who use a computer at work earn a higher wage rate than otherwise similar workers who do not use a computer at work. A variety of models are estimated to try to correct for unobserved variables that might be correlated with job-related computer use and earnings. Estimates suggest that workers who use computers on their job earn 10 to 15 percent higher wages. Additionally, the expansion in computer use in the 1980s can account for one-third to one-half of the increase in the rate of return to education.

Fundamental Information Analysis

Abstract: Fundamental analysis is aimed at determining the value of corporate securities by a careful examination of key value-drivers, such as earnings, risk, growth, and competitive position. In the context of such analysis, we identify below a set of financial variables (fundamentals) claimed by analysts to be useful in security valuation and examine these claims by estimating the incremental value-relevance of these variables over earnings. Our findings support the incremental value-relevance of most of the identified fundamentals; in fact, for the 1980s, the fundamentals add approximately 70%, on average, to the explanatory power of earnings with respect to excess returns. We also show that the returns-fundamentals relation is considerably strengthened when it is conditioned on macroeconomic variables, thereby demonstrating the importance of a contextual capital market analysis. For example, several fundamentals that appear only weakly value-relevant or even irrelevant in the unconditional analysis exhibit strong association with returns under specific economic conditions (e.g., the accounts receivable and the provision for doubtful receivables signals during high inflation). From a general examination of the role of fundamentals in security valuation we turn to the related issues of earnings persistence, growth, and the earnings response coefficient. We hypothesize that the funda-

Contrarian Investment, Extrapolation, and Risk

Abstract: For many years, stock market analysts have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This paper provides evidence that value strategies yield higher returns because these strategies exploit the mistakes of the typical investor and not because these strategies are fundamentally riskier.

Beauty and the Labor Market

Abstract: We develop a theory of sorting across occupations based on looks and derive its implications for testing for the source of earnings differentials related to looks. These differentials are examined using the 1977 Quality of Employment, the 1971 Quality of American Life, and the 1981 Canadian Quality of Life surveys, all of which contain interviewers' ratings of the respondents' physical appearance. Holding constant demographic and labor-market characteristics, plain people earn less than people of average looks, who earn less than the good-looking. The penalty for plainness is 5 to 10 percent, slightly larger than the premium for beauty. The effects are slightly larger for men than women; but unattractive women are less likely than others to participate in the labor force and are more likely to be married to men with unexpectedly low human capital. Better-looking people sort into occupations where beauty is likely to be more productive; but the impact of individuals' looks on their earnings is mostly independent of occupation.

International Trade and American Wages in the 1980s: Giant Sucking Sound or Small Hiccup?

Abstract: THE AMERICAN DREAM IS THAT each generation should live twice as well as its predecessor. During the hundred years before 1973, real average hourly earnings rose by 1.9 percent a year. ' At that rate earnings doubled every thirty-six years, and the dream was realized. The dream no longer holds. Since 1973 the United States has failed to match its historic track record. In 1973 average real hourly earnings, measured in 1982 dollars by the consumer price index (CPI), were $8.55. By 1992 they had actually declined to $7.43-a level that had been achieved in the late 1960s. Had earnings increased at their pre-1973 pace, they would have risen by 40 percent to more than $12.00. Or consider average real hourly compensation. This is a more comprehensive measure of the payments to labor because it includes fringe benefits as well as earnings. Between 1973 and 1991, real hourly compensation rose by only 5 percent. However the growth of labor income is measured, it clearly has slumped since 1973. A second ominous development in the American economy has accompanied this slump: a dramatic increase in the inequality of earnings. In

The timing of asset sales and earnings manipulation

Abstract: SYNOPSIS AND INTRODUCTION: This study presents an empirical examination of whether managers manipulate earnings through the timing of income recognition from disposal of long-lived assets and investments (hereafter assets). Since managers can often choose the period during which an asset will be sold, and since the principle of acquisition cost underlying the accounting valuation of assets implies that changes in the market value of an asset between acquisition and sale are reported in the period of sale, it follows that there are opportunities for managers to manipulate earnings through the timing of asset sales at relatively low cost. Two common explanations for earnings manipulations are examined: the earnings-smoothing and the debt-equity hypotheses.' The earningssmoothing hypothesis predicts that earnings are manipulated to reduce fluctuations around some level that is considered normal for the firm (see, e.g., Ronen and Sadan 1981, 6). The debt-equity hypothesis suggests a positive relation between a firm's debt-equity ratio and managers' choice of earnings-enhancing activities (see, e.g., Watts and Zimmerman 1986, 200-21 ).2 The findings are consistent with the timing of asset sales by managers so that the recognized income from these sales smooths intemporal earnings changes and mitigates accounting-based restrictions in bond cov-

Employment and Earnings

Abstract: This study is a collection of papers which discuss the social effects of policy reform. Each author covers a specific structural area of adjustment, and provides a model for planning and analyses. Policy reform entails major adjustments in all sectors of society. The 1980s found many countries in Latin America and Africa beginning structural adjustment policies in response to slumping economies. As these macroeconomic reforms were implemented, poverty and social conditions continued to deteriorate in many countries. This trend showed the importance of integrating social dimensions into the design of adjustment programs. These studies discuss the impacts of reform on the social dimensions of poverty, employment and earnings, migrations, human resources efforts in education and health, fertility, women and smallholders. An extensive bibliography is included

The Importance of Precautionary Motives in Explaining Individual and Aggregate Saving

Abstract: This paper examines predictions of a life-cycle simulation model -- in which individuals face uncertainty regarding their length of life, earnings, and out-of-pocket medical expenditures, and imperfect insurance and lending markets -- for individual and aggregate wealth accumulation. Relative to life-cycle or buffer-stock alternatives, our augmented life-cycle model better matches a variety of features of U.S. data, including: (1) aggregate wealth, (2) cross-sectional differences in wealth-age and consumption-age profiles by education group, and (3) short-run time-series co-movements of consumption and income.

The stock price effects of alternative types of management earnings forecasts

Abstract: SYNOPSIS AND INTRODUCTION: This paper examines the stock price effects of alternative types of management earnings forecasts. Beyond deciding whether to disclose forecasts, managers must decide whether to issue a point projection or a more qualitative estimate (e.g., a bounded range), and whether to project interim or annual earnings or both. Our empirical tests assess differences in the information content of management earnings forecasts that differ by form and horizon. Our tests provide a comprehensive investigation of the price effects of these alternative forecast disclosure types. While an extensive literature exists on the relation between management forecasts and stock prices, most previous studies examine only point and range forecasts of annual earnings (e.g., Penman 1980; Ajinkya and Gift 1984; Waymire 1984; McNichols 1989; Pownall and Waymire 1989). Exceptions include Lev and Penman (1990), Patell (1976), and Baginski et al. (1993). Lev and Penman (1990) include lower and upper bound forecasts for part of their sample period, but do not examine these disclosure forms separately. Patell (1976) provides evidence on mean price changes associated with a pooled sample of annual minimum and maximum forecasts. Baginski et al. (1993) examine alternative forecast forms. Prior analyses of managers' disclosure incentives speculate that investors may condition their assessment of forecast information on disclosure

The Demand for and Return to Education When Education Outcomes are Uncertain

Abstract: This article treats education as a sequential choice that is made under uncertainty. A simple model is used to explore the effects of ability, high school preparation, preferences for schooling, the borrowing rate, and ex post payoffs to college on the probability of various post-secondary college outcomes and the ex ante return to starting college. The model motivates an empirical method of accounting for uncertainty about educational outcomes and for nonlinearity in the relationship between years of education and earnings when estimating the expected return to the first year of college.

The Economics of Earnings

Abstract: The Economics of Earnings analyses the wages that people earn, the jobs they do, and the labour market laws and rules within which they operate. Moving away from the conventional emphasis on point-in-time one-period decisions, it stresses informed worker choice over the life-cycle - the human capital approach. Within this framework, the book synthesises research results so as to point the way to better labour market policies. Government policy is often directed towards labour market issues such as education subsidies, training programmes, health and safety laws, and employment protection laws. By using models based on informed worker choice - the supply side - this book will assist concerned individuals in government, industry and academic study to evaluate and improve labour market policies and practices.

Pay Differences among the Highly Paid: The Male-Female Earnings Gap in Lawyers' Salaries

Abstract: This article uses very detailed information on graduates of the University of Michigan Law School to examine male-female pay differences in that population. Men and women in this population have virtually identical human capital on graduation from law school, allowing us to examine carefully the different impact of children and work history on men's and women's careers and earnings. Taking time from work in order to care for children reduces wages significantly, but a rich set of controls, including childcare, work history, school performance, and job setting measures, still leave one-fourth to one-third of the earnings gap unexplained.

The Incidence and Costs of Job Loss: 1982-91

Abstract: I focus on two aspects of Job loss. First, I examine evidence on the incidence of job loss by worker and job characteristics including age, education, race, sex, industry, and tenure over the period from 1982 to 1991. Second, I examine the cost of job loss to workers in the form of 1) lower post-displacement employment probabilities, 2) lower probabilities of full-time employment for re-employed workers, and 3) lower earnings for full-time workers. Using data from Displaced Workers Surveys (DWS) from 1984 through 1992 to study job loss from 1982-91, I find that older workers and more educated workers are relatively more likely to suffer a job loss in the latter part of this period. Additionally, job loss became more common in some important service industries and relatively less common in manufacturing during the latter part of the ten-year period studied. Supplementing the DWS data with data from the outgoing rotation groups of the Current Population Survey from 1982-1991, I find that displaced workers are, relative to non-displaced workers, 1) less likely to be employed and 2) more likely to be employed part-time conditional on being employed. These effects seem to decline with time since displacement. There is no systematic secular change in these costs of displacement, either in the aggregate or for particular groups. Finally, I examine the earnings losses of full-time re-employed displaced workers by comparing their earnings change with the earnings change of full-time employed workers who were not displaced. I find, consistent with what others have found, that these earnings losses are substantial. Overall, the costs to displaced workers of job loss are substantial and come in several forms. However, the public perception that the current sluggish economy is worse than earlier downturns may reflect more who has lost jobs recently rather than either increased overall job loss or increased costs to those who are losing Jobs.

The Effect of Restructuring Charges on Executives' Cash Compensation

Abstract: Top executives' compensation contracts typically provide for annual incentive awards that link executives' cash compensation and reported earnings. This link has been confirmed empirically by Lambert and Larcker (1987), who document a positive association between the cash compensation of chief executive officers (CEOs) and their firms' contemporaneous earnings performance. The widespread use of earnings-based incentives has prompted concerns that executives may select real decisions and accounting procedures to maximize their earnings-based compensation, irrespective of the impact on the economic well-being of the firm (Kaplan and Atkinson 1989, 724; Watts and Zimmerman 1986, 204). These concerns presume that the earnings-based performance measures specified in compensation contracts are strictly adhered to in setting executive compensation. In practice, however, these plans are administered by compensation committees, who could adjust compensation to prevent executives rom engaging in opportunistic behavior. Existing research provides mixed evidence as to whether compensation committees adjust earnings-based compensation. For example, Abdel-khalik (1985) finds evidence that CEO compensation is adjusted in response to accounting procedure changes. In contrast, Healy et al. (1987) find no evidence that CEO compensation is adjusted forthe effects of accounting procedure changes on reported earnings. This study provides evidence suggesting that compensation committees do adjust earnings-based incentive compensation. It documents reliable and systematic evidence that CEOs' cash compensation is adjusted for restructuring charges. between 1982 and 1989. The short-term incentive plans of the sample firms do not include explicit provisions for restructuring charges to be excluded from the definition of earnings used to determine executives' incentive compensation. The empirical analysis, however, indicates that CEO cash compensation is shielded from restructuring charges relative to other components of earnings. The results also suggest that the degree to which executive compensation is adjusted for a restructuring charge depends on the characteristics of the restructuring. Our evidence is consistent with the hypothesis that compensation committees systematically override the provisions of incentive plans to avoid providing executives with incentives to behave opportunistically. Restructurings typically require a large charge to earnings but can have a positive impact on the economic well-being of a firm. By adjusting executive compensation for restructuring charges, the compensation committee ensures that executives are not deterred from undertaking value-enhancing restructurings.

Earnings adjustment of temporary migrants.

Abstract: The strong incentives of migrants to invest into human capital and the positive selective character of migration are the main explanations for the rapid decrease of the earnings gap between migrants and natives, and, in some cases, the cross-over of migrants' earings profiles with those of native workers, as found in a variety of empirical studies on migration to the USA, Canada and Australia. The present paper shows that in the case of temporary migration the optimal investment into country specific human capital should be lower than in the case of permanent migration. Investments may not be sufficient to allow migrants' earnings to catch up with those of native workers. Furthermore, it is shown that migration is positively selective only under certain labor market conditions. Empirical findings support the hypothesis that the migrant's length of stay in the host country has an effect on his investment into human capital and, consequently, on his earnings position. The results strongly suggest the need for carefully differentiating between temporary and permanent migration when investigating migrants' learnings assimilation.

The Voluntary Inclusion of Forecasts in the MD&A Section of Annual Reports

Abstract: In this study, we appeal to theories advanced by Darrough and Stoughton (1990) to enhance our understanding of why some firms may voluntarily include directional forecasts in their annual reports while others do not. The data are consistent with their predictions that a firm's disclosure policy reflects its concern for both financial market valuation and product market competition. We find that for good news firms, the probability of forecasting is increasing in the financing requirements but decreasing in the threat of competitor entry. The converse holds for "bad news" firms. These results lend further empirical support to the observation that the familiar good news hypothesis tested in the management earnings forecast literature offers only a partial explanation for the decision to forecast. Interestingly, however, even after controlling for financial and product market considerations, an overall voluntary disclosure bias still exists in the data. The data also provide support for the OSC's concern about a voluntary disclosure bias. Only 17.5 percent of our sample forecasts represent revisions downward relative to the previous year's results. However, in contrast to the OSC's concern about a general lack of forward-looking disclosures in annual reports, 35.9 percent of our sample firms include directional forecasts in their MD&A or elsewhere in the annual report.

The Legitimation of Inequality: Occupational Earnings in Nine Nations'

Abstract: Comprehensive data on public beliefs about the legitimacy of income inequality gathered from large, representative national sample surveys in nine nations conducted by the International Social Survey Programme show: (1) broad agreement on the legitimate pay of low-status, ordinary jobs, (2) agreement that high-status, elite occupations should be paid more than the minimum, but (3) disagreement over how much more they should get. This disagreement is linked to politics and social structure, with older, high SES, politically conservative respondents preferring markedly higher pay for elite occupations, but usually not preferring lower pay for ordinary jobs.

The intergenerational mobility of immigrants

Abstract: This article analyzes the intergenerational mobility of immigrants. Using the 1940-70 censuses, the study reveals an important link between the earnings of immigrants and the earnings of their American-born children. Although there is some regression toward the mean, the earnings of second-generation Americans are strongly affected by variables describing economic conditions in the source countries of their parents. Current immigration policy, therefore, not only determines how immigrants perform in the labor market but also determines tomorrow's differences in the labor market experiences of American-born ethnic groups.

Alcoholism, Work, and Income

Abstract: This article reports on an empirical analysis of the relationships between alcoholism and income and working. We show that the relationships between alcoholism and labor market success have important age or life-cycle dimensions. We present evidence that alcoholism may affect income more by restricting labor market participation than by affecting the wages of workers. Finally, we demonstrate that the effects of alcoholism on earnings depend on the extent to which one controls for other covariates associated with alcoholism; as such, we suggest that there may be important indirect as well as direct effects of alcoholism on labor market success.