Showing papers on "Earnings published in 2007"
TL;DR: In this article, the authors found that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant decline after the passing of SOX.
Abstract: We document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also find evidence that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. Finally, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent with increases in the fraction of equity based compensation.
2,124 citations
Posted Content•
TL;DR: The phenomenon of superstars as discussed by the authors is a well-known phenomenon in economics, where relatively small numbers of people earn enormous amounts of money and seem to dominate the fields in which they are engaged.
Abstract: IN RECENT years has not felt his gorge rise upon learning the staggeringly high salary of a shortstop, a movie star, an opera singer? A basketball player on a losing team earns $1.2 million; an author sells the paperback rights to his book for $800,000; a television interviewer switches networks and signs a contract calling for her to receive an annual income of just under $2 million. And the gorge continues to rise. The spectacle of people doing work that doesn't always seem overweighted with significance for annual (and, in the case of rock singers, sometimes nightly) sums of money that figure to exceed what you and I may earn in our lifetimes this, as they say nowadays, does not give off good vibes. What's going on here? What we are talking about, of course, is the phenomenon of superstars, wherein relatively small numbers of people earn enormous amounts of money and seem to dominate the fields in which they are engaged. This phenomenon appears to be increasingly important in the modern world certainly, with the breakdown of economic privacy, it is an increasingly visible phenomenon. The very word superstar implies inflation in our most precious currency, language; to be a star would have been sufficient in my youth. Yet we appear to be stuck with the term. As for the phenomenon itself, viewed from the standpoint of an economist, it may not be as puzzling as it at first glimpse seems. The first thing to be said in this connection is that certain economic activities admit extreme concentration of both personal reward and market size among a handful of participants. Every economic activity supports considerable diversity of talent and significant inequality in the personal distribution of rewards. Activities where superstars are found differ from those in which most of us make our livings by supporting much less diversity and much more inequality in the distribution of earnings. The bulk of earnings goes to relatively small numbers of practitioners typically, the few regarded as among the best in their fields. Similar distributions of earnings in the industrial sector would ultimately come to the attention of the Federal Trade Commission or the
2,091 citations
TL;DR: This paper examined whether a simple quantitative measure of language can be used to predict individual firms' accounting earnings and stock returns and found that the fraction of negative words in firm-specific news stories predicts low firm earnings.
Abstract: We examine whether a simple quantitative measure of language can be used to predict individual firms' accounting earnings and stock returns. Our three main findings are: (1) the fraction of negative words in firm-specific news stories forecasts low firm earnings; (2) firms' stock prices briefly underreact to the information embedded in negative words; and (3) the earnings and return predictability from negative words is largest for the stories that focus on fundamentals. Together these findings suggest that linguistic media content captures otherwise hard-to-quantify aspects of firms' fundamentals, which investors quickly incorporate in stock prices.
1,605 citations
TL;DR: The authors found that family firms have larger analyst following, more informative analysts' forecasts, and smaller bid-ask spreads than non-family firms, and that these characteristics of family firms affect their corporate disclosure practices.
Abstract: Compared to non-family firms, family firms face less severe agency problems due to the separation of ownership and management, but more severe agency problems that arise between controlling and non-controlling shareholders. These characteristics of family firms affect their corporate disclosure practices. For S&P 500 firms, we show that family firms report better quality earnings, are more likely to warn for a given magnitude of bad news, but make fewer disclosures about their corporate governance practices. Consistent with family firms making better financial disclosures, we find that family firms have larger analyst following, more informative analysts' forecasts, and smaller bid-ask spreads.
872 citations
Posted Content•
TL;DR: In this article, the authors focus on the competition for investor attention between a firm's earnings announcements and the earnings announcements of other firms and find that the immediate stock price and volume reaction to a firms earnings surprise is weaker, and post-earnings announcement drift is stronger, when a greater number of earnings announcements by other firms are made on the same day.
Abstract: Psychological evidence indicates that it is hard to process multiple stimuli and perform multiple tasks at the same time. This paper tests the INVESTOR DISTRACTION HYPOTHESIS, which holds that the arrival of extraneous news causes trading and market prices to react sluggishly to relevant news about a firm. Our test focuses on the competition for investor attention between a firm's earnings announcements and the earnings announcements of other firms. We find that the immediate stock price and volume reaction to a firm's earnings surprise is weaker, and post-earnings announcement drift is stronger, when a greater number of earnings announcements by other firms are made on the same day. Distracting news has a stronger effect on firms that receive positive than negative earnings surprises. Industry-unrelated news has a stronger distracting effect than related news. A trading strategy that exploits post-earnings announcement drift is unprofitable for announcements made on days with little competing news.
850 citations
TL;DR: In this paper, the effects of birth weight on both short-run and long-run outcomes for the same cohorts were examined, and it was shown that birth weight does matter, despite short run twin fixed effects estimates that are much smaller than OLS estimates.
Abstract: Lower birth weight babies have worse outcomes, both short-run in terms of one-year mortality rates and longer run in terms of educational attainment and earnings. However, recent research has called into question whether birth weight itself is important or whether it simply reflects other hard-to-measure characteristics. By applying within twin techniques using an unusually rich dataset from Norway, we examine the effects of birth weight on both short-run and long-run outcomes for the same cohorts. We find that birth weight does matter; despite short-run twin fixed effects estimates that are much smaller than OLS estimates, the effects on longer-run outcomes such as adult height, IQ, earnings, and education are significant and similar in magnitude to OLS estimates.
803 citations
TL;DR: This paper found that family firms have larger analyst following, more informative analysts' forecasts, and smaller bid-ask spreads than non-family firms, and they report better quality earnings, are more likely to warn for a given magnitude of bad news, but make fewer disclosures about their corporate governance practices.
746 citations
Posted Content•
TL;DR: In this paper, the authors used a unique and comprehensive dataset of foreign holdings by U.S. investors from 1997 to examine whether and why concerns about corporate governance results in fewer foreign holdings.
Abstract: As domestic sources of outside finance are limited in many countries around the world, it is important to understand factors that influence whether foreign investors provide capital to a country's firms. This study uses a unique and comprehensive dataset of foreign holdings by U.S. investors from 1997 to examine whether and why concerns about corporate governance results in fewer foreign holdings. Based on a sample of 4409 firms from 29 countries, we find that foreigners invest significantly less in firms with ownership structures that are more conducive to governance problems and, at the same time, reside in countries with poor outsider protection and disclosure. We argue that information asymmetry and monitoring costs faced by foreign investors are likely to drive this result. Supporting this explanation, we show that foreign investment is lower in firms that have opaque earnings and appear to engage in more earnings management.
608 citations
TL;DR: The authors examined the relation between earnings management and corporate governance in China by introducing a tunneling perspective and empirically demonstrated that firms with higher corporate governance levels have lower levels of earnings management.
608 citations
TL;DR: In this paper, the authors developed and tested the hypothesis that the magnitude of US multinational cash holdings are, in part, a consequence of the tax costs associated with repatriating foreign income, and found that less financially constrained firms and those that are more technology intensive exhibit a higher sensitivity of affiliate cash holdings to repatriation tax burdens.
569 citations
Posted Content•
TL;DR: In this article, the authors used a large cross-country panel dataset to find that remittances in Latin American and Caribbean (LAC) countries have increased growth and reduced inequality and poverty.
Abstract: Workers' remittances have become a major source of income for developing countries. However, little is still known about their impact on poverty and inequality. Using a large cross-country panel dataset, the authors find that remittances in Latin American and Caribbean (LAC) countries have increased growth and reduced inequality and poverty. These results are robust to the use of different instruments that attempt to correct for the potential endogeneity of remittances. Household survey-based estimates for 10 LAC countries confirm that remittances have negative albeit relatively small inequality and poverty-reducing effects, even after imputations for the potential home earnings of migrants.
[...]
TL;DR: For example, the authors found that women continue to earn considerably less than men on average, and the convergence that began in the late 1970s slowed noticeably in the 1990s, and this slowdown was not a blip in an overall trend, or has the pay gap converged as far as it can?
Abstract: Executive Overview The trends in the gender pay gap in the United States form a somewhat mixed picture. On the one hand, after a half a century of stability in the earnings of women relative to men, there has been a substantial increase in women's relative earnings since the late 1970s. One of the things that make this development especially dramatic and significant is that the recent changes contrast markedly with the relative stability of earlier years. On the other hand, there is still a gender pay gap. Women continue to earn considerably less than men on average, and the convergence that began in the late 1970s slowed noticeably in the 1990s. Is this slowdown just a blip in an overall trend, or has the pay gap converged as far as it can? We look at this issue in depth and make some predictions for the future.
TL;DR: In this article, a measure of the contribution of unequal opportunities to earnings inequality is proposed, which is based on the distinction between "circumstance" and "effort" variables in John Roemer's work on equality of opportunity.
Abstract: This paper proposes a measure of the contribution of unequal opportunities to earnings inequality. Drawing on the distinction between "circumstance" and "effort" variables in John Roemer's work on equality of opportunity, we associate inequality of opportunities with five observed circumstances which lie beyond the control of the individual--father's and mother's education; father's occupation; race; and region of birth. The paper provides a range of estimates of the importance of these opportunity-forming circumstances in accounting for earnings inequality in one of the world's most unequal countries. We also decompose the effect of opportunities into a direct effect on earnings and an indirect component, which works through the "effort" variables. The decomposition is applied to the distribution of male earnings in urban Brazil, in 1996. The five observed circumstances are found to account for between 10 and 37 percent of the Theil index, depending on cohort and allowing for the possibility of biased coefficient estimates due to unobserved correlates. On average, 60 percent of this impact operates through the direct effect on earnings. Parental education is the most important circumstance affecting earnings, but the occupation of the father and race also play a role.
TL;DR: Li et al. as mentioned in this paper examined how ownership, two-tier board structure, and auditor affect the informativeness of earnings for companies listed in China and found that the type of dominant shareholders, the size of the supervisory board, and the percentage of independent directors have an impact on the frequency of modified audit opinions.
TL;DR: In this paper, the authors investigate whether audit quality is associated with the predictability of accounting earnings by focusing on analyst earnings forecast properties and find that audit quality relates positively to unobservable financial reporting reliability.
Abstract: Under the assumption that audit quality relates positively to unobservable financial reporting reliability, we investigate whether audit quality is associated with the predictability of accounting earnings by focusing on analyst earnings forecast properties. The evidence shows that analysts' earnings forecast accuracy is higher and the forecast dispersion is smaller for firms audited by a Big Five auditor. We further find that auditor industry specialization is associated with higher forecast accuracy and less forecast dispersion in the non-Big Five auditor sample but not in the Big Five auditor sample. Overall, our results suggest that high quality audit provided by Big Five auditors and industry specialist non-Big Five auditors is associated with better forecasting performance by analysts.
TL;DR: In this article, the authors analyse the factors that lead to intergenerational persistence among sons, where this is measured as the association between childhood family income and later adult earnings, and explore the decline in mobility in the UK between the 1958 NCDS cohort and the 1970 cohort.
Abstract: We analyse in detail the factors that lead to intergenerational persistence among sons, where this is measured as the association between childhood family income and later adult earnings. We seek to account for the level of income persistence in the 1970 BCS cohort and also to explore the decline in mobility in the UK between the 1958 NCDS cohort and the 1970 cohort. The mediating factors considered are cognitive skills, non-cognitive traits, educational attainment and labour market attachment. Changes in the relationships between these variables, parental income and earnings are able to explain over 80% of the rise in intergenerational persistence across the cohorts.
TL;DR: In this article, the authors investigated to what extent individuals' risk preferences are correlated with the cross-sectional earnings risk of their occupation and found that individuals with low willingness to take risks are more likely to work in occupations with low earnings risk.
Posted Content•
TL;DR: The authors evaluated two reforms of the unemployment insurance (UI) system: reemployment bonuses and job search programs, and found that economic incentives affect the length of UI receipt and provide weak evidence that an earlier return to work does not decrease earnings.
Abstract: Recent social experiments have evaluated two reforms of the unemployment insurance (UI) system: reemployment bonuses and job search programs. The bonus experiments show that economic incentives affect the length of UI receipt and provide weak evidence that an earlier return to work does not decrease earnings. The experiments do not show the favorability of a permanent bonus program as they ignore its effect on the number of the claimants. The job search experiments test several more promising reforms. Nearly all of the combinations of services and increased enforcement reduce UI receipt and have favorable cost/benefit analyses. Earnings often increase, though the estimates are imprecise.
TL;DR: In this article, a quantitative model of consumer bankruptcy with three key features: life-cycle component, idiosyncratic earnings uncertainty, and expense uncertainty is presented, and the authors find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules.
Abstract: Consumer bankruptcy provides partial insurance against bad luck, but, by driving up interest rates, makes life-cycle smoothing more difficult. We argue that to assess this trade-off one needs a quantitative model of consumer bankruptcy with three key features: life-cycle component, idiosyncratic earnings uncertainty, and expense uncertainty (exogenous negative shocks to household balance sheets). We find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules. More persistent shocks make the bankruptcy option more desirable. Larger transitory shocks have the opposite effect. Our findings suggest the current US bankruptcy system may be desirable for reasonable parameter values. (JEL D14, D91, K35)
TL;DR: In this article, the authors examine the voluntary disclosure practices of family firms and find that family firms provide fewer earnings forecasts and conference calls, but more earnings warnings, which is consistent with family owners having greater litigation and reputation cost concerns.
Abstract: We examine the voluntary disclosure practices of family firms. We find that, compared to non-family firms, family firms provide fewer earnings forecasts and conference calls, but more earnings warnings. Whereas the former is consistent with family owners having a longer investment horizon, better monitoring of management, and lower information asymmetry between owners and managers, the higher likelihood of earnings warnings is consistent with family owners having greater litigation and reputation cost concerns. We also document that family ownership dominates non-family insider ownership and concentrated institutional ownership in explaining the likelihood of voluntary disclosure. Using alternative proxies for founding family's presence in the firm leads to similar results.
TL;DR: In this paper, the authors study the relationship of corporate governance policy and idiosyncratic risk and find that firms with fewer antitakeover provisions display higher levels of idiosyncratic risks, trading activity, and information about future earnings in stock prices.
Abstract: We study the relationship of corporate governance policy and idiosyncratic risk. Firms with fewer antitakeover provisions display higher levels of idiosyncratic risk, trading activity, private information flow, and information about future earnings in stock prices. Trading interest by institutions, especially those active in merger arbitrage, strengthens the relationship of governance to idiosyncratic risk. Our results indicate that openness to the market for corporate control leads to more informative stock prices by encouraging collection of and trading on private information. Consistent with an information-flow interpretation, the component of volatility unrelated to governance is associated with the efficiency of corporate investment. THE EFFECT OF CORPORATE GOVERNANCE on equity prices and the distribution of returns is an important issue in corporate finance. Gompers, Ishii, and Metrick (2003) and Cremers and Nair (2005) find that governance can directly influence equity prices. These and other authors generally posit that management constraints and incentives are the mechanisms through which governance influences prices. Any systematic effect on returns, however, also requires a link between governance provisions and investors’ expectations or information. For instance, Gompers et al. (2003) argue that in the early 1990s, investors might not have fully appreciated the agency costs engendered by weak governance. This paper extends the current understanding by showing how governance provisions and informed trading interact to influence the incorporation of information into stock prices. We test a trading link hypothesis, showing how specific aspects of governance that influence takeover vulnerability impact stock price informativeness. In particular, we focus on the specific path through the trading volume of arbitrage-oriented institutional investors. We reason that the absence of antitakeover provisions creates incentives to collect private information, which is a central determinant of idiosyncratic volatility. When trading activity is generated, it contributes to this idiosyncratic volatility and to other indications of
TL;DR: In this paper, the authors examine the effect of managerial ownership on financial reporting conservatism and find that as managerial ownership declines, the severity of agency problem increases, increasing the demand for conservatism.
Abstract: In this paper we examine the effect of managerial ownership on financial reporting conservatism. Separation of ownership and control gives rise to agency problems between managers and shareholders. Financial reporting conservatism is one potential mechanism to address these agency problems. We hypothesize that as managerial ownership declines, the severity of agency problem increases, increasing the demand for conservatism. Consistent with our hypothesis, we find that conservatism as measured by the asymmetric timeliness of earnings declines with managerial ownership. The negative association between managerial ownership and asymmetric timeliness of earnings is robust to various controls for the investment opportunity set. We thus provide evidence of a demand for conservatism from the firm's shareholders.
TL;DR: Li et al. as discussed by the authors investigated the role played by a firm's ownership structure in earnings management, with reference to the Chinese capital market, and found that the relationship between earnings management measures and ownership concentration exhibits a statistically significant non-linear, inverted U-shape pattern known as the "entrenchment versus alignment" effect.
Abstract: In this study, we investigate the role played by a firm’s ownership structure in earnings management, with reference to the Chinese capital market. We measure the impacts of both ownership concentration and different ownership types, specifically the difference between the state as blockholder and private blockholders.
Analysing 273 privately-owned and state-owned Chinese companies listed in 2002, we establish a link between ownership structure and firms’ earnings management practices. Our results show that the relationship between earnings management measures and ownership concentration exhibits a statistically significant non-linear, inverted U-shape pattern known as the “entrenchment versus alignment” effect. It is clear that privately-owned listed companies tend to maximise their accounting earnings more. However, the entrenchment effect of ownership concentration on earnings management is weaker in privately-owned listed firms than in state-owned listed firms. Our study also confirms that when a firm manages its earnings, it tends to do so through both operating-related accrual mechanisms and non-operating transactions with related parties.
TL;DR: The authors investigate whether earnings guidance affects aggregate stock returns through its effects on expectations about overall earnings performance and/or aggregate expected returns, and find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news.
Abstract: We investigate whether earnings guidance affects aggregate stock returns through its effects on expectations about overall earnings performance and/or aggregate expected returns. We find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news. We find more modest evidence that guidance, again, largely downward guidance, is associated with market returns - market returns appear to respond to guidance toward the end of each calendar quarter, when most earnings preannouncements are released, and there is some evidence that firm-level guidance affects market returns in short windows around its release.
TL;DR: In this paper, the authors test the investor distraction hypothesis, which holds that the arrival of extraneous news causes trading and market prices to react sluggishly to relevant news about a firm, and find that the immediate stock price and volume reaction to a firm's earnings surprise is weaker, and post-earnings announcement drift is stronger, when a greater number of earnings announcements by other firms are made on the same day.
Abstract: Psychological evidence indicates that it is hard to process multiple stimuli and perform multiple tasks at the same time. This paper tests the investor distraction hypothesis, which holds that the arrival of extraneous news causes trading and market prices to react sluggishly to relevant news about a firm. Our test focuses on the competition for investor attention between a firm's earnings announcements and the earnings announcements of other firms. We find that the immediate stock price and volume reaction to a firm's earnings surprise is weaker, and post-earnings announcement drift is stronger, when a greater number of earnings announcements by other firms are made on the same day. Distracting news has a stronger effect on firms that receive positive than negative earnings surprises. Industry-unrelated news has a stronger distracting effect than related news. A trading strategy that exploits post-earnings announcement drift is unprofitable for announcements made on days with little competing news.
TL;DR: In this paper, the authors present a benefit-cost analysis of a preschool program that provided intensive education during full-day child care, showing that the benefits of such a program include increased maternal earnings, decreased K-12 schooling costs, increased lifetime earnings and decreased costs related to smoking.
TL;DR: This article found 746 firms that report earnings strings of at least twenty quartes of consecutive increases in earnings per share (EPS) for at least 20 consecutive quarters of a year.
Abstract: This paper provides evidence on firms that report long “strings” of consecutive increases in earnings per share (EPS). First, we find 746 firms that report earnings strings of at least twenty quart...
TL;DR: In this paper, the authors examine the relation between auditor tenure and a firm's ability to use discretionary accruals to meet or beat analysts' earnings forecasts, and they find that firms with both short (two to three years) and long (13-15 years or more) tenure are more likely to report levels of discretionary accumruals that allow them to meet and beat earnings forecasts.
Abstract: We examine the relation between auditor tenure and a firm's ability to use discretionary accruals to meet or beat analysts' earnings forecasts. Regulators have long expressed concern over the use of earnings management to attain earnings targets. These concerns are compounded by lingering questions over whether long-term auditor-client relationships impair an auditor's ability to independently stem such practices. The profession counter-argues that mandatory auditor rotation reduces auditors' familiarity with the client and adversely affects audit quality. Consistent with both arguments, we find that firms with both short (two to three years) and long (13-15 years or more) tenure are more likely to report levels of discretionary accruals that allow them to meet or beat earnings forecasts. The results suggest that while regulatory mandates for periodic auditor turnover have negative effects, sustained long term auditor-client relationships may be also detrimental to audit quality. The generalizability of our results may not extend to firms that are not covered by analysts, as these firms do not face the same public pressure to manage earnings in order to meet or beat expectations.
TL;DR: The authors investigate whether earnings guidance affects aggregate stock returns through its effects on expectations about overall earnings performance and/or aggregate expected returns, and find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news.
TL;DR: This article examined over-time trends in eight nations during the 1980s and 1990s and found that the median-voter hypothesis appears to have little utility in redistributive policy.
Abstract: According to the ‘median-voter’ hypothesis, greater inequality in the market distribution of earnings or income tends to produce greater generosity in redistributive policy. We outline the steps in the causal chain specified by the hypothesis and attempt to assess these steps empirically. Prior studies focusing on cross-country variation have found little support for the median-voter model. We examine over-time trends in eight nations during the 1980s and 1990s. Here too the median-voter hypothesis appears to have little utility.