Showing papers on "Earnings published in 1994"

Detecting Earnings Management

Abstract: This paper evaluates alternative models for detecting earnings management. The paper restricts itself to models that assume the construct being managed is discretionary accruals, since such models are commonly used in the extant accounting literature. Existing models range from simple models in which discretionary accruals are measured as total accruals, to more sophisticated models that separate total accruals into a discretionary and a non-discretionary component. Prior to this paper, there had been no systematic evidence bearing on the relative performance of these alternative models at detecting earnings management. This paper evaluates the relative performance of the competing models by comparing the specification and power of commonly used test statistics across the measures of discretionary accruals generated by each model. The specification of the test statistics is evaluated by examining the frequency with which they generate type I errors for a random sample of firm-years and for samples of firm-years with extreme financial performance. We focus on samples with extreme financial performance because the stimuli investigated in previous research are frequently correlated with financial performance. The first sample of firms are targeted by the Securities and Exchange Commission for allegedly overstating annual earnings and the second sample is created by artificially introducing earnings management into a random sample of firms.

The Economics of Immigration

Abstract: This literature review concerns the impact of immigration on the economy of the host country focusing on the experience of the United States. The emphasis is on the period from the 1970s to the 1990s. The author shows that research earlier in this period generally concluded that the economic effects of immigration were positive but that more recent research on later migrations have generally concluded that immigration may be having an adverse effect on the earnings of native unskilled workers and be placing an increased burden on welfare programs. The importance of such economic analysis for the formulation of appropriate migration policies is stressed.

Why firms voluntarily disclose bad news

Abstract: This paper provides evidence on corporate voluntary disclosure practices through an examination of the earnings-related disclosures made by a random sample of 93 NASDAQ firms during 1981-90.' I find that, consistent with prior studies, earnings-related voluntary disclosures occur infrequently (on average, one disclosure for every ten quarterly earnings announcements); good news disclosures tend to be point or range estimates of annual earnings-per-share (EPS), while bad news disclosures tend to be qualitative statements about the current quarter's earnings; the (unconditional) stock price response to bad

The Post-Issue Operating Performance of IPO Firms.

Abstract: This article investigates the change in operating performance of firms as they make the transition from private to public ownership. A significant decline in operating performance subsequent to the initial public offering (IPO) is found. Additionally, there is a significant positive relation between post-IPO operating performance and equity retention by the original entrepreneurs, but no relation between post-IPO operating performance and the level of initial underpricing. Post-issue declines in the market-to-book ratio, price/earnings ratio, and earnings per share are also documented.

Beauty and the Labor Market

Abstract: The authors examine the impact of looks on earnings using interviewers' ratings of respondents' physical appearance. Plain people earn less than average-looking people, who earn less than the good-looking. The plainness penalty is 5 to 10 percent, slightly larger than the beauty premium. Effects for men are at least as great as for women. Unattractive women have lower labor-force participation rates and marry men with less human capital. Better-looking people sort into occupations where beauty may be more productive but the impact of individuals' looks is mostly independent of occupation, suggesting the existence of pure employer discrimination. Copyright 1994 by American Economic Association.

Top Executive Rewards and Firm Performance: A Comparison of Japan and the United States

Abstract: This paper studies top executive turnover and compensation, and their relation to firm performance in the largest Japanese and U.S. companies. Japanese executive turnover and compensation are related to earnings, stock returns, and, to a lesser extent, sales performance measures. The fortunes of Japanese top executives, therefore, are positively correlated with stock performance and current cash flows (or with factors contributing to such performance). The relations for the Japanese executives are generally economically and statistically similar to those for their U.S. counterparts. There is some evidence, however, that the fortunes of Japanese executives are more sensitive to low income but less sensitive to stock returns than those of U.S. executives.

Analyst Forecasts and Herding Behavior

Abstract: The use of analyst forecasts as proxies for investors' earnings expectations is commonplace in empirical research. An implicit assumption behind their use is that they reflect analysts' private information in an unbiased manner. As demonstrated here, this assumption is not necessarily valid. There is shown to be a tendency for analysts to release forecasts closer to prior earnings expectations than is appropriate, given their information. Further, analysts exhibit herding behavior, whereby they release forecasts similar to those previously announced by other analysts, even when this is not justified by their information. These results are shown to have interesting empirical implications. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Firm Valuation, Earnings Expectations, and the Exchange‐Rate Exposure Effect

Abstract: Consistent with previous research, we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar. We investigate the possibility that this failure is due to mispricing. Lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms, suggesting that mispricing does occur. A simple trading strategy based upon these results generates significant abnormal returns. Corroborating evidence from returns around earnings announcements as well as errors in analysts' forecasts of earnings is also provided. IT IS A WIDELY held view that exchange rate movement should affect the value of a firm. Standard economic analysis implies that the profitability and value of most U.S. firms with foreign sales or operations abroad should increase (decrease) with an unexpected depreciation (appreciation) of the dollar as expected foreign currency cash flows translate into larger (smaller) U.S.

Fiscal Paradise: Foreign Tax Havens and American Business

Abstract: The offshore tax haven affiliates of American corporations account for more than a quarter of US foreign investment, an nearly a third of the foreign profits of US firms. This paper analyzes the origins of this tax haven activity and its implications for the US and foreign governments. Based on the behavior of US fins in 1982, it appears that American companies report extraordinarily high profit rates on both their real and their financial investments in tax havens. We calculate from this behavior that the tax rate that maximizes tax revenue for a typical haven is around 6%. The revenue implications for the US are more complicated, since tax havens may ultimately enhance the ability of the US government to tax the foreign earnings of American companies.

Womens rising employment and the future of the family in industrial societies.

Abstract: A critical analysis was provided of the economic independence hypothesis and Beckers theories of marriage and family behavior. Historically there have been assessments of the fit between womens labor force participation and patterns of marriage formation divorce and fertility in order to determine how much coincidence played a role. Also examined were how well the theories of womens economic independence explain delayed marriage nonmarriage or both. Empirical evidence at the micro level was used to indicate the extent of support for economic independence theories. Specific attention was directed to Gary Beckers specialization theories; it was posited that specialization might actually put families and marriage at risk. Recent trends have shown a tremendous decline in mens labor market position which theories need to begin addressing. The specialization-trading model of marriage of marital relationships inevitably leads to a prediction of a decline in marriage. Low fertility means reduced need for womens specialization in home production and a low productivity population. A more adaptive family strategy for a modern industrial society would be based on both parents working. Increased womens employment serves as a substitute for the work of their children for enhancing social mobility and as a stabilizing factor in the familys economic equilibrium over the development cycle. When mens economic position and its impact on marriage behavior is modeled by Wilson and Neckerman a threshold effect emerges where for instance the rise of black female-headed families in the US is considered reflective of the decline in the marriageable supply of men. Census data on moderately well educated and less well educated males indicated a deteriorated labor market position between 1950 and 1980. 1) Mens labor market declines accelerated after 1970. 2) 25-34 year old male non-graduates as well as very young men experienced labor market declines. 3) Male high school graduates also suffered declines in employment particularly Blacks. These three trends occurred throughout the declines in prime marrying ages. Chinhui Juhn revealed that mens unemployment declined over time and once out of work there was little reentry into the work force. Deterioration in earnings was also evident. Earnings ratio data can obscure relationships. Mens declining earnings are effecting the ratio because womens earnings have remained stable since the mid 1980s. Even the economic position of college graduates who experienced income declines in the 1970s does not explain the continued rise in delayed marriage by the 1980s.

The Accounting Based Valuation of Corporate R&D

Abstract: The issue is how to extract realized R&D benefits from income statement numbers and is important given the current accounting policy of expensing R&D as incurred. To the extent that market participants can determine realized benefits and expect these benefits to persist in the future, they will use accounting earnings numbers to value current R&D. This study uses cross-sectional data to estimate a recursive system of two equations: one for earnings and one for valuation. The earnings equation associates earnings with recorded assets, advertising, and R&D expenditures. It extracts realized R&D benefits from reported earnings numbers. The valuation equation relates market values of equity to book values, earnings, and R&D expenditures. It determines how the accounting and R&D numbers are valued in the market. The coefficients derived from these two equations are then used to estimate the investment value of R&D. This system of equations assumes that past R&D generates earnings that create market value. The results from the earnings model indicate that reported earnings, adjusted for the expensing of R&D, do reflect realized benefits from R&D. On average, a one-dollar increase in R&D expenditures leads to a two-dollar increase in profit over a seven-year period. The results from the valuation model indicate that investors place a high value on R&D investments. On average, a one-dollar increase in R&D expenditure produces a five-dollar increase in market value. This effect of R&D on market values can be separated into an indirect and a direct component. The indirect effect, when R&D outlays affect market values through

The Effect of Sibling Sex Composition on Women's Education and Earnings

Abstract: This paper documents the impact of siblings on the education of men and women born in the United States between 1920 and 1965. We examine the effect of the number and sex composition of a boy or girl's siblings on that child's educational attainment. We find that throughout the century women's educational choices have been systematically affected by the sex composition of her siblings, and that men's choices have not. Women raised only with brothers have received on average significantly more education than women raised with any sisters, controlling for household size. Since sibling sex composition affects women's educational attainment and plausibly may be unrelated to other determinants of earnings, it may provide a useful instrument for education in earnings functions for women. Our results suggest that standard estimates significantly underestimate the return to schooling for women.

The value relevance of german accounting measures: an empirical analysis

Abstract: In this study we compare the value relevance of accounting measures for U.S. and German firms matched on industry and firm size, and evaluate the incremental informativeness of earnings adjusted on the basis of a formula proposed by analysts. German companies have been at the center of a controversy between the New York Stock Exchange (NYSE) and the Securities and Exchange Commission (SEC). The controversy arises from the SEC's insistence that, to list on a U.S. stock exchange, non-U.S. companies must reconcile earnings and shareholders' equity to U.S. generally accepted accounting practice (U.S.-GAAP) (Fuerbringer [ 1992] and Jarrell [ 1992] )41 The NYSE 's concern has been that

Endowments and the Allocation of Schooling in the Family and in the Marriage Market: The Twins Experiment

Abstract: 03 We show how comparisons between the within-twin correlations of human capital outcomes across identical and nonidentical twins can be used to identify the variability in the individual-specific component of endowments and the responsiveness of schooling to individual-specific endowments in the family and in the marriage market even when schooling is measured with error. Estimates from two twins samples indicate that 27 (42) percent of the variance in log earnings (obesity) is due to variability in individual-specific endowments, allocations of schooling reinforce specific endowments, and individual-specific earnings endowments of men and their wives' schooling are negatively associated.

Evidence on the Validity of Cross-Sectional and Longitudinal Labor Market Data

Abstract: This article investigates error properties of survey reports of labor market variables. We use the Panel Study of Income Dynamics (PSID) Validation Study, a two-wave panel survey of workers employed by a large firm that shared its detailed payroll records. Individuals' reports of annual earnings are fairly accurate. Errors are negatively related to true earnings, reducing bias due to measurement error when earnings are used as an independent variable. Biases are moderately larger for changes in earnings. Earnings per hour are less reliably reported than annual earnings. Biases in estimating earnings functions are relatively small, but those in labor supply functions may be important.

Optimal income taxation : an example with a U-shaped pattern of optimal marginal tax rates

Abstract: Using the Mirrlees optimal income tax model with quasi-linear preferences, the paper examines conditions for marginal tax rates to be rising at high income levels and declining in an interval containing the modal skill. It examines conditions for the marginal tax rate to be higher at a low skill level than at the high skill level with the same density--an argument only holding for skill levels above a cutoff where resources of a worker are marginally of the same value as resources of the government. Data on earnings rates are presented. Copyright 1998 by American Economic Association.(This abstract was borrowed from another version of this item.)

Speaking fluency, writing fluency and earnings of migrants

Abstract: This paper analyzes the determinants of language abilities of migrant workers and the impact of language proficiency on their earnings position. The analysis is based on data for West Germany. The first part presents an ordered probit analysis of the determinants of German speaking and writing fluency for both male and female migrants. The data allow not only to consider personal characteristics of the migrant as explanatory variables, but to analyze additionally the effect of the family context and of illiteracy on the migrant's German language fluency. In the second part, the effect of language on the migrant's earnings position is analyzed. It is shown that language abilities, and especially writing proficiency, considerably improve the earnings position of migrants.

Obesity and Stature in Adolescence and Earnings in Young Adulthood: Analysis of a British Birth Cohort

Abstract: Objective: To examine the association between obesity and stature at various ages and earnings in young men and women at age 23 years. Design: We estimated the effect of obesity on earnings by constructing a series of ordinary least-squares regression equations in which the dependent variable was the natural logarithm of hourly earnings at age 23 years. We report the coefficients for obese subjects compared with those for the nonobese subjects and for height while controlling for a number of other factors that are known to affect pay. Setting: A birth cohort of 12 537 respondents at age 23 years from the National Child Development Study, which consists of all children born in England, Scotland, and Wales between March 3 and 9, 1958. Outcome Measure: Hourly earnings at age 23 years as it relates to obesity, as determined by the body mass index and stature measured as a continuous variable. Results: Men and women who had been obese at age 16 years had significantly fewer years of schooling than did their nonobese peers. Obese women performed poorly on math and reading tests at ages 7,11, and 16 years when compared with their nonobese peers. Regression analyses indicated no relationship between obesity at any age and earnings at age 23 years inmales. In contrast, there was a statistically significant inverse relation between obesity and earnings infemales, independent of parental social class and ability test scores of the child. Female adolescents who were in the top 10% of the body mass index at age 16 years earned 7.4% less (95% confidence interval, −11% to −3.8%) than their nonobese peers; those in the top 1% earned 11.4% less (−21% to −1.5%). The inverse relationship between obesity at 16 years of age and earnings persisted whether the adolescent female remained obese (−6.4% [−12.3% to−4.7%]) or moved into the nonobese category by age 23 years (−7.5% [−12.5% to −2.4%]). A positive relationship was found between height at age 16 years and earnings at age 23 years for men (but not for women) after controlling for social class and IQ. Conclusions: This study demonstrates an inverse relationship between obesity at 16 years and earnings at age 23 years for British women; the magnitude of the relation is similar to that of other factors that predict earnings, such as gender, job training, and union membership. In the case of men, we found a positive relationship between height and subsequent earnings but no obesity effects. (Arch Pediatr Adolesc Med. 1994;148:681-687)

The Ability of Earnings to Predict Future Earnings and Cash Flow

Abstract: This paper examines the value relevance of earnings by testing their ability to predict two future benefits of equity investment: earnings and cash flow from operations. Previous research (discussed below) has given an incomplete view of earnings' predictive ability, as it has typically focused on short horizons while ignoring the longer-term benefits that are also valued, as in Ohlson [1990]. I test earnings' ability to predict future earnings and future cash flow from operations1 one through eight years ahead using annual data from

Eliciting Student Expectations of the Returns to Schooling

Abstract: We report here on the design and first application of an interactive computer-administered personal interview (CAPI) survey eliciting from high school students and college undergraduates their expectations of the income they would earn if they were to complete different levels of schooling We also elicit respondents' beliefs about current earnings distributions Whereas a scattering of earlier studies have elicited point expectations of earnings unconditional on future schooling, we elicit subjective earnings distributions under alternative scenarios for future earnings We find that respondents, even ones as young as high school sophomores, are willing and able to respond meaningfully to questions eliciting their earnings expectations in probabilistic form Respondents vary considerably in their earnings expectations but there is a common belief that the returns to a college education are positive and that earnings rise between ages 30 and 40 There is a common belief that one's own future earnings are rather uncertain Moreover, respondents tend to overestimate the current degree of earnings inequality in American society

Damodaran on Valuation: Security Analysis for Investment and Corporate Finance

Abstract: Approaches to Valuation. Estimation of Discount Rates. Estimation of Cash Flows. Estimation of Growth Rates. Dividend--Discount Models. Free--Cash--Flow--to--Equity Discount Models. Valuing a Firm--The Free--Cash--Flow--to--Firm Approach. Special Cases in Valuation. Price/Earnings Ratios. Price/Book Value Ratios. Price/Sales Ratio. Management Decisions, Corporate Strategy, and Firm Value. Valuation for Acquisitions and Takeovers. Option--Pricing Theory. Applications of Option--Pricing Theory to Valuation. Overview and Conclusion. Appendices. References. Disk Documentation. Index.