Showing papers on "Earnings published in 2004"
TL;DR: This paper investigated whether individuals feel worse off when others around them earn more in other words, do people care about relative position and does "lagging behind the Joneses" diminish well-being?
Abstract: This paper investigates whether individuals feel worse off when others around them earn more In other words, do people care about relative position and does "lagging behind the Joneses" diminish well-being? To answer this question, I match individual-level panel data containing a number of indicators of well-being to information about local average earnings I find that, controlling for an individual's own income, higher earnings of neighbors are associated with lower levels of self-reported happiness The data's panel nature and rich set of measures of well-being and behavior indicate that this association is not driven by selection or by changes in the way people define happiness There is suggestive evidence that the negative effect of increases in neighbors' earnings on own well-being is most likely caused by interpersonal preferences, ie people having utility functions that depend on relative consumption in addition to absolute consumption
1,738 citations
TL;DR: In this paper, the authors describe a model of earnings and earnings growth and demonstrate how this model may be used to obtain estimates of the expected rate of return on equity capital, and compare these estimates with estimates of expected rates of return implied by commonly used heuristics, such as the PEG ratio and the PE ratio.
Abstract: I describe a model of earnings and earnings growth and I demonstrate how this model may be used to obtain estimates of the expected rate of return on equity capital. These estimates are compared with estimates of the expected rate of return implied by commonly used heuristics—viz., the PEG ratio and the PE ratio. Proponents of the PEG ratio (which is the price‐earnings [PE] ratio divided by the short‐term earnings growth rate) argue that this ratio takes account of differences in short‐run earnings growth, providing a ranking that is superior to the ranking based on PE ratios. But even though the PEG ratio may provide an improvement over the PE ratio, it is arguably still too simplistic because it implicitly assumes that the short‐run growth forecast also captures the long‐run future. I provide a means of simultaneously estimating the expected rate of return and the rate of change in abnormal growth in earnings beyond the (short) forecast horizon—thereby refining the PEG ratio ranking. The method may also...
1,044 citations
TL;DR: This paper examined the link between managers' equity incentives arising from stock-based compensation and stock ownership and earnings management and found that managers with high equity incentives are more likely to sell shares in the future and this motivates these managers to engage in earnings management.
Abstract: This paper examines the link between managers' equity incentives - arising from stock-based compensation and stock ownership - and earnings management. We hypothesize that managers with high equity incentives are more likely to sell shares in the future and this motivates these managers to engage in earnings management to increase the value of the shares to be sold. Using stock-based compensation and stock ownership data over the 1993-2000 time period, we document that managers with high equity incentives sell more shares in subsequent periods. As expected, we find that managers with high equity incentives are more likely to report earnings that meet or just beat analysts' forecasts. We also find that managers with consistently high equity incentives are less likely to report large positive earnings surprises. This finding is consistent with the wealth of these managers being more sensitive to future stock performance, which leads to increased reserving of current earnings to avoid future earnings disappointments. Collectively, our results indicate that equity incentives lead to incentives for earnings management.
931 citations
TL;DR: In this article, the authors evaluate how the Progresa program, which provides poor mothers in rural Mexico with education grants, has affected enrollment and extrapolate these estimates to the lifetime schooling and the earnings of adults to approximate the internal rate of return on the public schooling subsidies as they increase expected private wages.
828 citations
TL;DR: In this paper, the authors estimate the monetary returns to particular majors as well as find the causes of the ability sorting across majors and find that large earnings and ability differences exist across majors.
825 citations
TL;DR: This article examined the market reaction to a sample of 403 restatements announced from 1995 to 1999 and found that more negative returns are associated with restatement involving fraud, affecting more accounts, decreasing reported income and attributed to auditors or management.
809 citations
TL;DR: The authors investigate the extent to which the trading and trade-generating activities of three informed market participants (financial analysts, institutional investors, and insiders) influence the relative amount of firm-specific, industry-level, and market-level information impounded into stock prices, as measured by stock return synchronicity.
Abstract: We investigate the extent to which the trading and trade‐generating activities of three informed market participants—financial analysts, institutional investors, and insiders—influence the relative amount of firm‐specific, industry‐level, and market‐level information impounded into stock prices, as measured by stock return synchronicity. We find that stock return synchronicity is positively associated with analyst forecasting activities, consistent with analysts increasing the amount of industry‐level information in prices through intra‐industry information transfers. In contrast, stock return synchronicity is inversely related to insider trades, consistent with these transactions conveying firm‐specific information. Supplemental tests show that insider and institutional trading accelerate the incorporation of the firm‐specific component of future earnings news into prices alone, while analyst forecasting activity accelerates both the industry and firm‐specific component of future earnings news. Our resul...
774 citations
TL;DR: In this paper, the authors investigate how ownership concentration, directors' and executive's incentives, and board structure vary with earnings timeliness, and organizational complexity measured as geographic and/or product line diversification.
773 citations
TL;DR: In this paper, the authors investigate Gompers, Ishii, and Metrick's (2003) finding that firms with weak shareholders rights exhibit significant stock market underperformance, and they find no evidence that this underperformance surprises the market.
Abstract: We investigate Gompers, Ishii, and Metrick's (2003) finding that firms with weak shareholder rights exhibit significant stock market underperformance. If the relation between poor governance and poor returns is causal, we expect that the market is negatively surprised by the poor operating performance of weak governance firms. We find that firms with weak shareholder rights exhibit significant operating underperformance. However, analysts' forecast errors and earnings announcement returns show no evidence that this underperformance surprises the market. Our results are robust to controls for takeover activity. Overall, our results do not support the hypothesis that weak governance causes poor stock returns. This is a revised version of a paper previously titled 'Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Analysts' Expectations' that was originally posted on April 21, 2004.
704 citations
TL;DR: The authors construct a quantitative, general equilibrium, overlapping-generations model in which parents and children are linked by accidental and voluntary bequests and by earnings ability, and show that the introduction of a bequest motive generates lifetime savings profiles more consistent with the data.
Abstract: Previous work has had difficulty generating household saving behaviour that makes the distribution of wealth much more concentrated than that of labour earnings, and that makes the richest households hold onto large amounts of wealth, even during very old age. I construct a quantitative, general equilibrium, overlapping-generations model in which parents and children are linked by accidental and voluntary bequests and by earnings ability. I show that voluntary bequests can explain the emergence of large estates, while accidental bequests alone cannot, and that adding earnings persistence within families increases wealth concentration even more. I also show that the introduction of a bequest motive generates lifetime savings profiles more consistent with the data.
677 citations
TL;DR: In this paper, the authors empirically examined the impact of tourism on the long-run economic growth of Greece by using causality analysis of real gross domestic product, real effective exchange rate and international tourism earnings.
Abstract: This paper empirically examines the impact of tourism on the long-run economic growth of Greece by using causality analysis of real gross domestic product, real effective exchange rate and international tourism earnings A Multivariate Auto Regressive (VAR) model is applied for the period 1960:I-2000:IV The results of co-integration analysis suggest that there is one co-integrated vector among real gross domestic product, real effective exchange rate and international tourism earnings Granger causality tests based on Error Correction Models (ECMs), have indicated that there is a ‘strong Granger causal’ relationship between international tourism earnings and economic growth, a ‘strong causal’ relationship between real exchange rate and economic growth, and simply ‘causal’ relationships between economic growth and international tourism earnings and between real exchange rate and international tourism earnings
TL;DR: The authors found a significant positive effect of English proficiency on wages among adults who immigrated to the United States as children and found that much of this effect appears to be mediated through education.
Abstract: Research on the effect of language skills on earnings is complicated by the endogeneity of language skills. This study exploits the phenomenon that younger children learn languages more easily than older children to construct an instrumental variable for language proficiency. We find a significant positive effect of English proficiency on wages among adults who immigrated to the United States as children. Much of this effect appears to be mediated through education. Differences between non-English-speaking origin countries and English-speaking ones that might make immigrants from the latter a poor control group for nonlanguage age-at-arrival effects do not appear to drive these findings.
TL;DR: In this paper, the authors examine whether the walkdown to beatable targets is associated with managerial incentives to sell stock after earnings announcements on the firm's behalf or from their personal accounts (through option exercises and stock sales).
Abstract: It has been alleged that firms and analysts engage in an “earnings-guidance game” where analysts first issue optimistic earnings forecasts and then “walk down” their estimates to a level that firms can beat at the official earnings announcement. We examine whether the walkdown to beatable targets is associated with managerial incentives to sell stock after earnings announcements on the firm’s behalf (through new equity issuance) or from their personal accounts (through option exercises and stock sales). Consistent with these hypotheses, we find that the walk-down to beatable targets is most pronounced when firms or insiders are net sellers of stock after an earnings announcement. These findings provide new insights on the impact of capital-market incentives on communications between managers and analysts.
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TL;DR: Burgstahler and Dichev (1997)/Degeorge et al. as mentioned in this paper show that since the mid-1990s, but not before then, managers seek to avoid negative quarterly earnings surprises more than to avoid either quarterly losses or quarterly earnings decreases.
Abstract: Applying a Burgstahler and Dichev (1997)/Degeorge et al. (1999) type methodology to quarterly data for the 1985-2002 time period, we show that, since the mid-1990s, but not before then, managers seek to avoid negative quarterly earnings surprises more than to avoid either quarterly losses or quarterly earnings decreases. Our findings suggest that the quarterly earnings threshold hierarchy proposed by Degeorge et al. (1999) does not apply to recent years, and that managers' claim that avoiding quarterly earnings decreases is the threshold they most seek to achieve (Graham et al. 2004) is inconsistent with their actions. We provide an intuitively appealing economic rationale for why the shift in threshold hierarchy occurred; since the mid-1990s, but not before then, investors unambiguously rewarded (penalized) firms for reporting quarterly earnings meeting (missing) analysts' estimates more than they did for meeting (missing) the other two thresholds. We provide several explanations for why investors unambiguously reward firms for reporting quarterly earnings that meet or beat analysts' estimates more than for meeting the other two thresholds late (but not early) in our sample period: increased media coverage given to analyst forecasts, more analyst following, more firms covered by analysts, and temporal increases in both the accuracy and precision of analyst forecasts.
TL;DR: This article investigated the effect of board composition on the practice of earnings management in Canada and found that earnings are managed upward to avoid reporting losses and earnings declines and that earnings management decreases with the average tenure of outside directors as board members of the firm.
TL;DR: In this article, the authors examined short-sales transactions in the five days prior to earnings announcements of 913 Nasdaq-listed firms and found that abnormal short-selling is significantly linked to post-announcement stock returns.
Abstract: This paper examines short-sales transactions in the five days prior to earnings announcements of 913 Nasdaq-listed firms. The tests provide evidence of informed trading in pre-announcement short-selling because they reveal that abnormal short-selling is significantly linked to post-announcement stock returns. Also, the tests indicate that short-sellers typically are more active in stocks with low book-to-market valuations or low SUEs. The levels of pre-announcement short-selling, however, mostly appear to reflect firm-specific information rather than these fundamental financial characteristics. We believe that these results should encourage financial market regulators to consider providing more extensive and timely disclosures of short-selling to investors.
TL;DR: In this article, the tax expense is used as a powerful context to study earnings management, because it is one of the last accounts closed prior to earnings announcements and managers estimate and negotiate tax expense with their auditors.
Abstract: We assert that the tax expense is a powerful context in which to study earnings management, because it is one of the last accounts closed prior to earnings announcements. Although many pre-tax accruals must be posted in the year-end general ledger, managers estimate and negotiate tax expense with their auditors immediately prior to earnings announcements. We hypothesize that changes from third- to fourth-quarter effective tax rates (ETRs) are negatively related to whether and how much a firm’s earnings absent tax expense management miss analysts’ consensus forecast, a proxy for target earnings. We measure earnings absent tax expense management as actual pre-tax earnings adjusted for the annual ETR reported at the third quarter. We provide robust evidence that firms lower their projected ETRs when they miss the consensus forecast, which is consistent with firms decreasing their tax expense if non-tax sources of earnings management are insufficient to achieve targets. We also find that firms that exceed earnings targets increase their ETR, but this effect is less significant. By studying the tax expense in total, rather than narrow components of deferred tax expense, our results provide general evidence that reported taxes are used to manage earnings.
TL;DR: In this paper, the authors evaluate the impact of a major school reform, that took place in the 1950s in Sweden, on educational attainment and earnings, and find that the reform increased both the educational attainment, and the earnings of children whose fathers had just compulsory education.
Abstract: In this paper we evaluate the impact of a major school reform, that took place in the 1950s in Sweden, on educational attainment and earnings. The reform, which has many common elements with reforms in other European countries including the UK, consisted of increasing compulsor schooling, imposing a national curriculum and abolishing selection by ability into Academic and non-academic streams at the age of 12 (comprehensive school reform). Our data combines survey data with administrative sources. We find that the reform increased both the educational attainment and the earnings of children whose fathers had just compulsory education. However the earnings of those with educated parents declined - possibly because of a dilution of quality at the top end of the education levels. The overall effect of the reform was however positive.
TL;DR: For example, the 25 firms that paid the largest dividends in 2000 account for a majority of the aggregate dividends and earnings of industrial firms as discussed by the authors, while the vast majority of firms have at best a modest collective impact on aggregate earnings and dividends.
TL;DR: This article found that abnormal accounting accruals are unusually high around stock offers, especially high for firms whose offers subsequently attract lawsuits, and that such accrual reversals tend to reverse after stock offers and are negatively related to post-offer stock returns.
01 Apr 2004
TL;DR: In this article, the association between parents' education and profession, and secondary track school choice and subsequent career prospects of the child was analyzed over the last six decades, and it was shown that parental background is strongly related to the secondary track choice of a child, and subsequent educational achievements.
Abstract: The way parents take influence on the education of their children is a crucial aspect of intergenerational mobility. Unlike in the UK or in the US, in Germany an important decision about which educational track to follow is made at a relatively early stage: after primary school, at the age of ten. In this paper, we use micro data to analyse the association between parents' education and profession, and secondary track school choice and subsequent career prospects of the child. Our analysis covers the last six decades. We demonstrate that parental background is strongly related to the secondary track choice of the child, and subsequent educational achievements. We find a slight convergence for individuals from different parental background over the last decades. We also find a positive trend for females to follow higher secondary school tracks, keeping parental background constant. The association between parental class and educational choice translates into substantial earnings differentials later in life.
TL;DR: The authors construct an overlapping generations general equilibrium model in which households face uninsurable earnings shocks over the course of their lifetimes and find that individual-specific earnings risk can provide a coherent explanation.
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TL;DR: In this article, the authors show that the counterintuitive finding in prior literature that disclosure triggers litigation could be driven by the endogeneity between disclosure and litigation, and they find no evidence that disclosure potentially deters certain types of litigation.
Abstract: Securities litigation poses large costs to firms. The risk of litigation is heightened when firms have unexpectedly large earnings disappointments. Previous literature presents mixed evidence on whether voluntary disclosure of the bad news prior to regularly scheduled earnings announcements deters or triggers litigation. We show that the counterintuitive finding in prior literature that disclosure triggers litigation could be driven by the endogeneity between disclosure and litigation. Using a simultaneous equations methodology, we find no evidence that disclosure triggers litigation. In fact, consistent with economic arguments, our evidence suggests that disclosure potentially deters certain types of litigation.
TL;DR: The authors investigate the ability of a tax-based fundamental, the ratio of tax-to-book income, to predict earnings growth and stock returns and to explain the earnings price ratio, and find that the tax fundamental is strongly related to contemporaneous earnings-price ratios and only weakly related to subsequent stock returns.
Abstract: We investigate the ability of a tax‐based fundamental—the ratio of tax‐to‐book income—to predict earnings growth and stock returns and to explain the earnings‐price ratio This tax fundamental reflects both temporary and permanent book‐tax differences as well as tax accruals, such as changes in the tax valuation allowance We find that the tax‐to‐book income ratio predicts subsequent five‐year earnings changes, both before and after the implementation of Statement of Financial Accounting Standards (SFAS) No 109 in 1993 For the pre‐SFAS No 109 period, the tax information is unrelated to contemporaneous earnings‐price ratios and strongly related to subsequent stock returns Conversely, for the post‐SFAS No 109 period, the tax fundamental is strongly related to contemporaneous earnings‐price ratios and only weakly related to subsequent stock returns, indicating improvement over time in investors' perceptions of the implications of the tax information for future earnings Deferred taxes, a component of ou
TL;DR: In this paper, the authors examined the effect of accounting restatements on a firm's cost of equity capital, and found that on average, accounting re-tatements lead to both decreases in expected future earnings and increases in the firm's costs of capital.
Abstract: This paper examines the effect of accounting restatements on a firm's cost of equity capital. We show that, on average, accounting restatements lead to both decreases in expected future earnings and increases in the firm's cost of equity capital. Depending on the model used, relative percentage increases in the cost of equity capital average between 7 and 19% in the month immediately following a restatement. The relative increase in the cost of capital dissipates as time passes and after controlling for analyst forecast biases, but continues to average between 6 and 15% in the most conservative setting. We also show that restatements initiated by auditors are associated with the largest increase in the cost of capital, and that firms with greater leverage experience greater increases in their cost of capital. Overall, our evidence is consistent with accounting restatements lowering the perceived earnings quality of the firm and increasing investors' required rates of return.
TL;DR: In this paper, the authors investigate auditors' assessment of earnings manipulation risk and corporate governance risk and their planning and pricing decisions in the presence of these identified risks, and find that auditors plan increased effort and billing rates for clients with earnings manipulations.
Abstract: This paper investigates auditors' assessments of earnings manipulation risk and corporate governance risk, and their planning and pricing decisions in the presence of these identified risks. To conduct this investigation, we use engagement partners' assessments of their existing clients made during the participating public accounting firm's client continuance risk assessment process. We find that auditors plan increased effort and billing rates for clients with earnings manipulation risk, and that the positive relationships between earnings manipulation risk and both effort and billing rates are greater for clients that also have heightened corporate governance risk. These findings provide evidence that auditors assess situations involving both an aggressive management and inadequate corporate governance, and that there is a relationship between those assessments and auditors' planning and pricing decisions.
TL;DR: In this article, the authors examined the circumstances of non-GAAP financial reporting by 492 U.S. companies that announced restatements from 1995 to 1999 and found a significant association between accounting items and litigation, whether occurrences or resolutions.
Abstract: Our study examines the circumstances of non-GAAP financial reporting by 492 U.S. companies that announced restatements from 1995 to 1999. We focus on income statements to analyze the occurrence and resolution of litigation over restatements and explore the role of accounting items in bringing and resolving this litigation. We provide evidence on the pervasiveness of accounting misstatements, describe their nature, and show how, if at all, they affect litigation. We assess the nature of restatements by determining whether regular, recurring earnings from primary operations (core) or other components of earnings (noncore) are misstated, and we assess their pervasiveness by estimating the number of primary accounts misstated. In our sample, companies with core restatements have higher frequencies of intentional misstatements (fraud) and subsequent bankruptcy or delisting. Likewise, these companies have, on average, more material misstatements, more negative security price reactions to restatement announcements, and more negative security price changes over the six months preceding and following restatement announcements. However, controlling for these and other factors, we find a significant association between accounting items and litigation, whether occurrences or resolutions. Specifically, core restatements — driven primarily by misstatements of revenue, a component of core earnings — and more pervasive restatements each play a role, while misstatements of noncore earnings alone do not.
TL;DR: This paper found that firms with low GAAP earnings informativeness are more likely to disclose pro-forma earnings than other firms and that strategic considerations, measured using the direction of GAAP EPS surprises, are an important determinant of pro forma reporting.
Abstract: This paper provides evidence on the characteristics of firms that include “pro forma” earnings information in their press releases, whether the usefulness of pro forma earnings to investors varies systematically with these characteristics, and whether the investor response to pro forma earnings is consistent with market efficiency or mispricing. Using a sample of 249 press releases from 1997–99, we find that firms with low GAAP earnings informativeness are more likely to disclose pro forma earnings than other firms. We also find that strategic considerations, measured using the direction of GAAP earnings surprises, are an important determinant of pro forma reporting. In addition, our examination of the relative and incremental information content of pro forma earnings shows that investors find pro forma earnings to be more useful when GAAP earnings informativeness is low or when strategic considerations are absent. Tests of the predictive ability of pro forma earnings for future profitability and returns ...
TL;DR: In this article, the conditional variance of returns is a combination of jumps and smoothly changing components, which captures occasional large changes in price, due to the impact of news innovations such as earnings surprises, as well as smoother changes in prices which can result from liquidity trading or strategic trading as information disseminates.
Abstract: This paper models dierent components of the return distribution which are assumed to be directed by a latent news process. The conditional variance of returns is a combination of jumps and smoothly changing components. This mixture captures occasional large changes in price, due to the impact of news innovations such as earnings surprises, as well as smoother changes in prices which can result from liquidity trading or strategic trading as information disseminates. Unlike typical SV-jump models, previous realizations of both jump and normal innovations can feedback asymmetrically into expected volatility. This is a new source of asymmetry (in addition to good versus bad news) that improves forecasts of volatility particularly after large moves such as the ’87 crash. A heterogeneous Poisson process governs the likelihood of jumps and is summarized by a timevarying conditional intensity parameter. The model is applied to returns from individual companies and three indices. We provide empirical evidence of the impact and feedback eects of jump versus normal return innovations, contemporaneous and lagged leverage eects, the time-series dynamics of jump clustering, and the importance of modeling the dynamics of jumps around high volatility
TL;DR: In this article, the authors evaluate the information content of analysts' one-quarter-ahead earnings forecast revisions and recommendation revisions at various points in event time relative to earnings announcement dates and find that the revisions are least informative in the week after earnings announcements.