Showing papers on "Earnings published in 2012"
TL;DR: In this paper, the authors examine whether socially responsible firms behave differently from other firms in their financial reporting, and they find that firms that exhibit corporate social responsibility also behave in a responsible manner to constrain earnings management, thereby delivering more transparent and reliable financial information to investors.
Abstract: This study examines whether socially responsible firms behave differently from other firms in their financial reporting. Specifically, we question whether firms that exhibit corporate social responsibility (CSR) also behave in a responsible manner to constrain earnings management, thereby delivering more transparent and reliable financial information to investors as compared to firms that do not meet the same social criteria. We find that socially responsible firms are less likely (1) to manage earnings through discretionary accruals, (2) to manipulate real operating activities, and (3) to be the subject of SEC investigations, as evidenced by Accounting and Auditing Enforcement Releases against top executives. Our results are robust to (1) controlling for various incentives for CSR and earnings management, (2) considering various CSR dimensions and components, and (3) using alternative proxies for CSR and accruals quality. To the extent that we control for the potential effects of reputation and financial performance, our findings suggest that ethical concerns are likely to drive managers to produce high-quality financial reports.
1,284 citations
TL;DR: The authors study whether managers use real activities manipulation and accrual-based earnings management as substitutes in managing earnings and find that managers trade off the two earnings manage managers, and they conclude that managers do not.
Abstract: I study whether managers use real activities manipulation and accrual-based earnings management as substitutes in managing earnings. I find that managers trade off the two earnings manage...
945 citations
TL;DR: This article examined corporate financial and investment decisions made by female executives compared to male executives and found that male executives undertake more acquisitions and issue debt more often than female executives, while female executives place wider bounds on earnings estimates and are more likely to exercise stock options early.
Abstract: We examine corporate financial and investment decisions made by female executives compared to male executives Male executives undertake more acquisitions and issue debt more often than female executives Further, acquisitions made by firms with male executives have announcement returns approximately 2% lower than those made by female executive firms, and debt issues also have lower announcement returns for firms with male executives Female executives place wider bounds on earnings estimates and are more likely to exercise stock options early This evidence suggests men exhibit relative overconfidence in significant corporate decision-making compared to women
840 citations
TL;DR: The authors analyzes the magnitude and sources of long-term earnings declines associated with graduation from college during a recession, using a large longitudinal university-employer-employee dataset, and finds that the cost of recessions for new graduates is substantial and unequal.
Abstract: This paper analyzes the magnitude and sources of long-term earnings declines associated with graduating from college during a recession. Using a large longitudinal university-employer-employee dataset, we find that the cost of recessions for new graduates is substantial and unequal. Unlucky graduates suffer persistent earnings declines lasting ten years. They start to work for lower paying employers, and then partly recover through a gradual process of mobility toward better firms. We document that more advantaged graduates suffer less from graduating in recessions because they switch to better firms quickly, while earnings of less advantaged graduates can be permanently affected by cyclical downgrading. (JEL E32, I23, J22, J23, J31)
764 citations
TL;DR: In this article, Mahoney et al. argue that managers use language throughout an earnings press release to signal, both directly and more subtly, their expectations about future performance, and the market responds to this information.
Abstract: Earnings press releases are ‘‘the major news event of the season for many companies as well as investors, analysts, financial media, and the market’’ (Mahoney and Lewis 2004). The information content of earnings press releases has increased significantly over time (Kross and Kim 2000; Lo and Lys 2001; Francis, Schipper, and Vincent 2002a, 2002b; Landsman and Maydew 2002; Collins, Li, and Xie 2005) and has been accompanied by a corresponding increase in press release length. Specifically, the number of words used in earnings press releases increased approximately five times between 1980 and 1999 (Francis et al. 2002b). This trend continued over our sample period, with median earnings press release length increasing to more than 1,700 words by 2003, a greater than 90 percent increase from 1998. This dramatic increase in the sheer number of words used in earnings press releases suggests an important question: Does the language used throughout an earnings press release provide a signal regarding managers’ expectations about future performance? If so, does the market respond to this information? Earnings press releases are characterized as a disclosure mechanism revealing a ‘‘package of information’’ to investors (Francis et al. 2002b). An important element of this information package is language used in the earnings press release, which provides the unifying framework within which earnings are announced and other quantitative and qualitative disclosures are made. Prior research on earnings press releases examined the incremental information content of specific, qualitative disclosures like officers’ comments. For instance, officers’ comments communicating good and bad news about the future are informative above and beyond the announcement of earnings per se (Hoskin, Hughes, and Ricks 1986; Francis et al. 2002b). The information revealed to investors via earnings press release language, however, likely extends beyond specific officers’ comments. Consistent with this proposition, promotional language in press releases (including, but not limited to, earnings press releases) is observed not only in officer comments, but also in the more prevalent, nonquotation sections of the release (Maat 2007). We argue that managers use language throughout an earnings press release to signal, both directly and more subtly, their expectations about future performance. Managers’ earnings press release language varies significantly across firms and ranges from straightforward to promotional (Mahoney and Lewis 2004). Managers generally report financial performance in comparative terms, and so we expect managers’ earnings press release
440 citations
TL;DR: In this article, a detailed analysis of 49 firms subject to AAERs suggests that approximately one-quarter of the misstatements meet the legal standards of intent, while the remaining three quarters reflect an optimistic bias that is not necessarily intentional.
439 citations
TL;DR: In this paper, the authors examined whether the information content of earnings announcements increases in countries following mandatory IFRS adoption, and conditions and mechanisms through which increases occur, and found evidence of three mechanisms that increase information content: reducing reporting lag, increasing analyst following, and increasing foreign investment.
406 citations
TL;DR: This article examined banks across 27 countries and found that forward-looking provisioning designed to smooth earnings dampens discipline over risk-taking, consistent with diminished transparency inhibiting outside monitoring, and that proactive provisioning reflecting timely recognition of expected future loan losses is associated with enhanced risk taking discipline.
393 citations
TL;DR: In this paper, the authors investigate factors that influence investor information demand around earnings announcements and to provide insights into how variation in information demand impacts the capital market response to earnings, finding that abnormal Google search increases about two weeks prior to the earnings announcement, spikes markedly at the announcement, and continues at high levels for a period after the announcement.
Abstract: The objective of this study is to investigate factors that influence investor information demand around earnings announcements and to provide insights into how variation in information demand impacts the capital market response to earnings. The Internet is one channel through which public information is disseminated to investors and we propose that one way that investors express their demand for public information is via Google searches. We find that abnormal Google search increases about two weeks prior to the earnings announcement, spikes markedly at the announcement, and continues at high levels for a period after the announcement. This finding suggests that information diffusion is not instantaneous with the release of the earnings information, but rather is spread over a period surrounding the announcement. We also find that information demand is positively associated with media attention and news, and is negatively associated with investor distraction. When investors search for more information in the days just prior to the announcement, preannouncement price and volume changes reflect more of the upcoming earnings news and there is less of a price and volume response when the news is announced. This result suggests that, when investors demand more information about a firm, the information content of the earnings announcement is partially preempted.
362 citations
TL;DR: In this paper, the authors find that employees with higher earnings are less likely to leave relative to employees with lower earnings, but if they do, are more likely to create a new venture than join another firm Employee entrepreneurship has a larger adverse impact on source firm performance than moves to established firms.
Abstract: We theorize that the value provided by the firm's complementary assets has important implications for the exit decisions of employees and their subsequent effects on the firm's performance Using linked employee-employer data from the US Census Bureau on legal services, we find that employees with higher earnings are less likely to leave relative to employees with lower earnings, but if they do, are more likely to create a new venture than join another firm Employee entrepreneurship has a larger adverse impact on source firm performance than moves to established firms, even controlling for observable employee quality Our findings suggest that in knowledge intensive settings, managers should focus on tailoring compensation packages to help minimize the adverse impact of employee entrepreneurship, particularly among high performing individuals Copyright © 2011 John Wiley & Sons, Ltd
355 citations
12 Nov 2012
TL;DR: In this article, a new method for using the information contained in income-generating equations to account for or decompose the level of income inequality in a country and its change over time is presented.
Abstract: This paper devises a new method for using the information contained in income-generating equations to “account for” or “decompose” the level of income inequality in a country and its change over time. In the levels decomposition, the shares attributed to each explanatory factor are independent of the particular inequality measure used. In the change decomposition, methods are presented to break down the contribution of each explanatory factor into a coefficients effect, a correlation effect, and a standard deviation effect. In an application to rising earnings inequality in the United States, it is found that schooling is the single most explanatory variable, only one other variable (occupation) has any appreciable role to play, and all of schooling’s effect was a coefficients effect.
TL;DR: This paper examined country variation in the associations between motherhood and earnings, in cultural attitudes surrounding women's employment, and in child-care and parental leave policies, and found that cultural attitudes moderate the impact of policies on women's earnings across countries.
Abstract: Mothers’ employment and earnings partly depend on social policies and cultural norms supporting women’s paid and unpaid work. Previous research suggests that work–family policies are deeply shaped by their cultural context. We examine country variation in the associations between motherhood and earnings, in cultural attitudes surrounding women’s employment, and in child-care and parental leave policies. We model how cultural attitudes moderate the impact of policies on women’s earnings across countries. Parental leaves and public childcare are associated with higher earnings for mothers when cultural support for maternal employment is high, but have less positive or even negative relationships with earnings where cultural attitudes support the male breadwinner/female caregiver model.
TL;DR: In this paper, the authors examine the incremental informativeness of quarterly earnings conference calls and the corresponding market reaction, and find that conference call linguistic tone is a significant predictor of abnormal returns and trading volume.
Abstract: Quarterly earnings conference calls are becoming a more pervasive tool for corporate disclosure. However, the extent to which the market embeds information contained in the tone (i.e. sentiment) of conference call wording is unknown. Using computer aided content analysis, we examine the incremental informativeness of quarterly earnings conference calls and the corresponding market reaction. We find that conference call linguistic tone is a significant predictor of abnormal returns and trading volume. Furthermore, conference call tone dominates earnings surprises over the 60 trading days following the call. The question and answer portion of the call has incremental explanatory power for the post-earnings-announcement drift and this significance is primarily concentrated in firms that do not pay dividends, illustrating differences in investor behavior based on the level of cash flow uncertainty. Additionally, we find that a context specific linguistic dictionary is more powerful than a more widely used general dictionary (Harvard IV-4 Psychosocial).
TL;DR: This paper found that the likelihood and speed of forced CEO turnover are positively related to a firm's earnings management and that boards tend to act proactively to discipline managers who manage earnings aggressively, before the manipulations lead to costly external consequences.
TL;DR: In this article, the economic impact of social pressure to share income with kin and neighbors in rural Kenyan villages was measured by a lab experiment in which they randomly vary the observability of investment returns and found that women adopt an investment strategy that conceals the size of their initial endowment in the experiment, although that strategy reduces their expected earnings.
Abstract: This paper measures the economic impact of social pressure to share income with kin and neighbors in rural Kenyan villages. The authors conduct a lab experiment in which they randomly vary the observability of investment returns. The goal is to test whether subjects reduce their income in order to keep it hidden. The analysis finds that women adopt an investment strategy that conceals the size of their initial endowment in the experiment, although that strategy reduces their expected earnings. This effect is largest among women with relatives attending the experiment. Parameter estimates suggest that women behave as though they expect to be pressured to share four percent of their observable income with others, and substantially more when close kin can observe income directly. Although this paper provides experimental evidence from a single African country, observational studies suggest that similar pressure from kin may be prevalent in many rural areas throughout Sub-Saharan Africa.
TL;DR: This article found that firms exhibit significantly lower levels of pessimistic language and higher levels of optimistic language in earnings press releases relative to the corresponding management discussion and analysis (MD&A) disclosures.
Abstract: We use textual-analysis software to quantify the language used in earnings press releases and the corresponding Management Discussion and Analysis (MD&A) for approximately 13,000 firm quarters between 1998 and 2003. Analyzing two narrative disclosures in which managers describe firm performance for the same quarter allows us to examine managers’ use of language across alternative communication outlets. Our general prediction, which relies on prior literature suggesting that there is a greater market response to information disclosed in an earnings announcement press release versus an SEC filing, is that managers disclose less pessimistic language and more optimistic language in earnings press releases relative to the corresponding MD&A disclosures. We first document that firms exhibit significantly lower levels of pessimistic language and higher levels of optimistic language in earnings press releases relative to the MD&A. We then construct a measure of the proportion of total pessimistic language reported in an earnings press release relative to the corresponding MD&A and find this proportional measure is negatively associated with the intensity of managers’ strategic reporting incentives. In additional analyses, we find a negative association between the level of pessimistic language in the MD&A and future firm performance, controlling for pessimistic language in the corresponding earnings press release. This evidence supports our assertion that managers disclose pessimistic language in the MD&A that provides information incremental to that in the corresponding earnings press release. Overall, our results are consistent with managers’ use of alternative communication outlets as part of a strategy to influence the market’s response to information disclosed.
TL;DR: In this paper, the authors use earnings forecasts from a cross-sectional model to proxy for cash flow expectations and estimate the implied cost of capital (ICC) for a large sample of firms over 1968-2008.
TL;DR: This article measured managerial affective states during earnings conference calls by analyzing conference call audio files using vocal emotion analysis software and found that when managers are scrutinized by analysts during conference calls, positive and negative affects displayed by managers are informative about the firm's financial future.
Abstract: We measure managerial affective states during earnings conference calls by analyzing conference call audio files using vocal emotion analysis software. We hypothesize and find that, when managers are scrutinized by analysts during conference calls, positive and negative affects displayed by managers are informative about the firm's financial future. Analysts do not incorporate this information when forecasting near-term earnings. When making stock recommendation changes, however, analysts incorporate positive but not negative affect. This study presents new evidence that managerial vocal cues contain useful information about a firm's fundamentals, incremental to both quantitative earnings information and qualitative “soft” information conveyed by linguistic content.
TL;DR: In this article, the authors examined whether marketwide investor sentiment influences the stock price sensitivity to firm-specific earnings news and found that sentiment-driven mispricing of earnings contributes to the general misprice of stocks due to investor sentiment.
Abstract: We examine whether market-wide investor sentiment influences the stock price sensitivity to firm-specific earnings news. Using the recently developed measure of investor sentiment by Baker and Wurgler (2006), we find that the stock price sensitivity to good earnings news is higher during high sentiment periods than during periods of low sentiment, whereas the stock price sensitivity to bad earnings news is higher during periods of low sentiment than during periods of high sentiment. This influence of sentiment is especially pronounced for the earnings news of small stocks, young stocks, high volatility stocks, non-dividend-paying stocks, and stocks with extremely high and low market-to-book ratios. Further analysis suggests that the sentiment-driven mispricing of earnings contributes to the general mispricing of stocks due to investor sentiment. JEL Classifications: D14; D21; G24.
TL;DR: Evidence is found that consolidation facilitates the exercise of monopsonistic power vis a vis physicians, whose absolute employment and relative earnings decline in its wake.
Abstract: We examine whether and to what extent consolidation in the U.S. health insurance industry is leading to higher employer-sponsored insurance premiums. We make use of a proprietary, panel dataset of employer-sponsored healthplans enrolling over 10 million Americans annually between 1998 and 2006 to explore the relationship between premium growth and changes in market concentration. We exploit the differential impact of a large national merger of two insurance firms across local markets to estimate the causal effect of concentration on market-level premiums. We estimate real premiums increased by approximately 7 percentage points (in a typical market) due to the rise in concentration during our study period. We also find evidence that consolidation facilitates the exercise of monopsonistic power vis a vis physicians, whose absolute employment and relative earnings decline in its wake.
TL;DR: Families of children with ASD face significant economic burden given the substantial health care expenses associated with ASD, and the economic impact of having lower income in addition to these expenses is substantial.
Abstract: OBJECTIVE: To examine changes in parental labor force participation, hours of work, and annual earnings associated with childhood autism spectrum disorders (ASD).
TL;DR: The authors found that both expected earnings and students' abilities in the different majors are important determinants of a student's choice of a college major, and that 7.8% of students would switch majors if they had the same expectations about the average returns to different majors and differed only in their perceived comparative advantages across these majors.
TL;DR: The authors studied the allocation and compensation of human capital in the U.S. finance industry over the past century and found that financial deregulation is associated with skill intensity, job complexity, and high wages for finance employees.
Abstract: We study the allocation and compensation of human capital in the U.S. finance industry over the past century. Across time, space, and subsectors, we find that financial deregulation is associated with skill intensity, job complexity, and high wages for finance employees. All three measures are high before 1935 and after 1980, but not in the interim period. Workers in the finance industry earn the same education-adjusted wages as other workers until 1990 and significantly more afterward. By 2006 the premium is 40% on average, and 200% for top earners and CEOs. Earnings risk and firm size effects account for some of the premium, but the majority does not appear to be sustainable.
TL;DR: In this paper, the authors provide empirical evidence on how corporate sustainability performance (CSP), as proxied by membership of the Dow Jones sustainability index, is reflected in the market value of equity.
Abstract: This study provides empirical evidence on how corporate sustainability performance (CSP), as proxied by membership of the Dow Jones sustainability index, is reflected in the market value of equity. Using a theoretical framework combining institutional perspectives, stakeholder theory, and resource-based perspectives, we develop a set of hypotheses that relate the market value of equity to CSP. For a sample of North American firms, our preliminary results show that CSP has significant explanatory power for stock prices over the traditional summary accounting measures such as earnings and book value of equity. However, further analyses suggest that we should not focus on corporate sustainability itself. Our findings suggest that what investors really do is to penalize large profitable firms with low level of CSP. Firms with incentives to develop a high level of CSP not engaging on such strategy are, thus, penalized by the market.
TL;DR: In this paper, the authors used Amazon Mechanical Turk (MTurk) to run economic game experiments and found that the results were comparable to those run in laboratory settings, even when using very low stakes.
Abstract: Online labor markets such as Amazon Mechanical Turk (MTurk) offer an unprecedented opportunity to run economic game experiments quickly and inexpensively. Using Mturk, we recruited 756 subjects and examined their behavior in four canonical economic games, with two payoff conditions each: a stakes condition, in which subjects' earnings were based on the outcome of the game (maximum earnings of $1); and a no-stakes condition, in which subjects' earnings are unaffected by the outcome of the game. Our results demonstrate that economic game experiments run on MTurk are comparable to those run in laboratory settings, even when using very low stakes.
TL;DR: This article examined the determinants of the choice of the college major when the length of studies and future earnings are uncertain, and found that nonpecuniary factors are a key determinant of schooling choices.
Abstract: This paper examines the determinants of the choice of the college major when the length of studies and future earnings are uncertain. We estimate a three-stage schooling decision model, focusing on the effect of expected earnings on major choice. We control for dynamic selection through the use of mixture distributions. Exploiting variations across the French business cycle in the relative returns to the majors, our results yield a very low, though significant, elasticity of major choice to expected earnings. This suggests that at least for the French university context, nonpecuniary factors are a key determinant of schooling choices.
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TL;DR: This paper provided the first rigorous estimates of the labor-market returns to community college certificates and diplomas, as well as estimating the returns to the more commonly-studied associate's degrees.
Abstract: This paper provides among the first rigorous estimates of the labor-market returns to community college certificates and diplomas, as well as estimating the returns to the more commonly-studied associate’s degrees. Using administrative data from Kentucky, we estimate panel-data models that control for differences among students in pre-college earnings and educational aspirations. Associate’s degrees and diplomas have quarterly earnings returns of nearly $2,400 for women and $1,500 for men, compared with much smaller returns for certificates. There is substantial heterogeneity in returns across fields of study. Degrees, diplomas, and – for women – certificates correspond with higher levels of employment.
TL;DR: In this paper, tax-motivated income shifting within multinational corporations is investigated using exogenous earnings shocks at the parent firm and investigates how these shocks propagate across low-tax and high-tax multinational subsidiaries.
Abstract: This paper presents a new approach to estimating the existence and magnitude of tax-motivated income shifting within multinational corporations. Existing studies of income shifting use changes in corporate tax rates as a source of identification. In contrast, this paper exploits exogenous earnings shocks at the parent firm and investigates how these shocks propagate across low-tax and high-tax multinational subsidiaries. This approach is implemented using a large panel of European multinational affiliates over the period 1995-2005. The central result is that parents’ positive earnings shocks are associated with a significantly positive increase in pretax profits at low-tax affiliates, relative to the effect on the pretax profits of high-tax affiliates. The result is robust to controlling for various other differences between low-tax and high-tax affiliates and for country-pair-year fixed effects. Additional tests suggest that the estimated effect is attributable primarily to the strategic use of debt across affiliates. The magnitude of income shifting estimated using this approach is substantial, but somewhat smaller than that found in the previous literature.
TL;DR: In this article, the influence of managerial incentives to meet or beat the zero earnings benchmark on labor cost behavior of private Belgian firms was investigated and it was shown that managers of firms reporting a small profit focus on firing employees who are relatively low cost to fire.
Abstract: This study investigates the influence of managerial incentives to meet or beat the zero earnings benchmark on labor cost behavior of private Belgian firms. We posit that relative to managers of firms reporting healthy profits, managers meeting or beating the zero earnings benchmark will increase labor costs to a smaller extent when activity increases and decrease labor costs to a larger extent when activity decreases. This should take the form of more symmetric labor cost behavior for firms that report a small profit. Our findings are consistent with this prediction. Using detailed employee data, we show that managers of firms reporting a small profit focus on firing employees who are relatively low cost to fire. To protect their reputation in the labor market, managers of other firms, particularly those reporting healthy profits, limit the numbers of dismissals and react to activity changes by changing the number of hours that employees work. Data Availability: Data are available from the sourc...
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TL;DR: In this paper, the authors studied the cyclical nature of individual earnings risk using a dataset from the U.S. Social Security Administration, which contains (uncapped) earnings histories for millions of anonymous individuals.
Abstract: This paper studies the nature of business cycle variation in individual earnings risk using a dataset from the U.S. Social Security Administration, which contains (uncapped) earnings histories for millions of anonymous individuals. The base sample is a nationally representative panel containing 10 percent of all U.S. males from 1978 to 2010. We use these data to decompose individual earnings growth during recessions into "between-group" and "within-group" components. We begin with the behavior of within-group shocks. Contrary to past research, we do not find the variance of idiosyncratic earnings shocks to be countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical. That is, during recessions, the upper end of the shock distribution collapses--large upward earnings movements become less likely--whereas the bottom end expands--large drops in earnings become more likely. Thus, while the dispersion of shocks does not increase, shocks become more left skewed and, hence, riskier during recessions. Second, to study between-group differences, we group individuals based on several observable characteristics at the time a recession hits. One of these characteristics--the average earnings of an individual at the beginning of a business cycle episode--proves to be an especially good predictor of fortunes during a recession: prime-age workers that enter a recession with high average earnings suffer substantially less compared with those who enter with low average earnings (such "asymmetry" is not evident in expansions). Finally, we find that the cyclical nature of earnings risk is dramatically different for the top 1 percent compared with all other individuals--even relative to those in the top 2 to 5 percent.