ECONOMIC INQUIRY, Issue 3 2010
GARETT JONES
We show that a country's average IQ score is a useful predictor of the wages that immigrants from that country earn in the United States, whether or not one adjusts for immigrant education. Just as in numerous microeconomic studies, 1 IQ point predicts 1% higher wages, suggesting that IQ tests capture an important difference in cross-country worker productivity. In a cross-country development accounting exercise, about one-sixth of the global inequality in log income can be explained by the effect of large, persistent differences in national average IQ on the private marginal product of labor. This suggests that cognitive skills matter more for groups than for individuals. (JEL J24, J61, O47) [source]

RETIREMENT WEALTH AND LIFETIME EARNINGS,

INTERNATIONAL ECONOMIC REVIEW, Issue 2 2007
Lutz Hendricks
This article argues that a satisfactory theory of wealth inequality should account not only for the marginal distribution of wealth, but also for the joint distribution of wealth and earnings. The article describes the joint distribution of retirement wealth and lifetime earnings in the Panel Study of Income Dynamics. It then evaluates the ability of a stochastic life-cycle model to account for key features of this distribution. The life-cycle model fails to account for three key features of the data. (1) The correlation between lifetime earnings and retirement wealth is too high. (2) The wealth gaps between earnings rich and earnings poor households are too large. (3) Wealth inequality among households with similar lifetime earnings is too small. Models in which households differ in rates of return or time preferences account much better for the joint distribution of retirement wealth and lifetime earnings. [source]

EARNINGS AND LINGUISTIC PROFICIENCY IN A BILINGUAL ECONOMY*

THE MANCHESTER SCHOOL, Issue 3 2005
ANDREW HENLEY
Bilingualism is a widespread phenomenon, yet its economic effects are under researched. Typically studies find that bilingual workers are disadvantaged. Governments often protect minority languages through official promotion of bilingualism, with potential economic consequences. This paper addresses the impact of bilingualism on earnings, using the example of Wales. Results show a positive raw differential of 8 to 10 per cent depending on definition of linguistic proficiency. This differential persists in earnings function estimates, which control for human capital and demographic characteristics as well as local area effects. The potential endogeneity of language choice and earnings is addressed through the use of appropriate instrumental variables. Results suggest that bilingualism may be exogenous to the determination of earnings. [source]

Accounting Conservatism and the Temporal Trends in Current Earnings' Ability to Predict Future Cash Flows versus Future Earnings: Evidence on the Trade-off between Relevance and Reliability

CONTEMPORARY ACCOUNTING RESEARCH, Issue 2 2010
SATI P. BANDYOPADHYAY
M41; C23; D21; G38 This research reports that an increasing level of accounting conservatism over the 1973,2005 period is associated with: (1) an increase in the ability of current earnings to predict future cash flows and (2) a decrease in the ability of current earnings to predict future earnings. We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples in both in-sample and out-of-sample analyses and are robust to the use of alternative measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations among conservatism, relevance, reliability, and usefulness suggest a trade-off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards has a possible adverse impact on earnings usefulness through a negative effect on reliability. [source]

Incentives and Opportunities to Manage Earnings around Option Grants,

CONTEMPORARY ACCOUNTING RESEARCH, Issue 3 2009
Terry A. Baker
First page of article [source]

Letting the "Tail Wag the Dog": The Debate over GAAP versus Street Earnings Revisited,

CONTEMPORARY ACCOUNTING RESEARCH, Issue 3 2007
Jeffery S. Abarbanell
First page of article [source]

Discussion of "Letting the ,Tail Wag the Dog': The Debate over GAAP versus Street Earnings Revisited",

CONTEMPORARY ACCOUNTING RESEARCH, Issue 3 2007
Mark T. Bradshaw
First page of article [source]

Discussion of "Letting the ,Tail Wag the Dog': The Debate over GAAP versus Street Earnings Revisited",

CONTEMPORARY ACCOUNTING RESEARCH, Issue 3 2007
Theodore E. Christensen
First page of article [source]

Shareholder Income Taxes and the Relation between Earnings and Returns,

CONTEMPORARY ACCOUNTING RESEARCH, Issue 3 2005
DAN S. DHALIWAL
Abstract The purpose of this study is to investigate whether and how shareholder-level taxes affect earnings response coefficients (ERCs). Our tests indicate that when the tax rate on dividends increases, ERCs decrease for firms with high levels of dividend yield and whose marginal investor is likely to be an individual. For firms with high levels of share repurchase yield and whose marginal investor is likely to be an individual, an increase in dividend tax rate has no discernible effect on ERCs. These results are consistent with the notion that the tax penalty on dividends, relative to capital gains, reduces the earnings-return relation. [source]

Capital Investment and Earnings: International Evidence

CORPORATE GOVERNANCE, Issue 5 2009
Ahmet Can Inci
ABSTRACT Manuscript Type: Empirical Research Question/Issue: We examine the nature of the dynamic linkage (causality) between earnings and capital investment using firm-level data from around the world to see whether the legal environment, including corporate governance and monitoring mechanisms, and financial development are important in the profitability of capital investment. Research Findings/Insights: Using firms in 40 countries over the period 1988,2004, we find that the causality from earnings to capital investment is positive and strong in almost all countries, irrespective of the type of legal system and the degree of financial development. However, the causality from capital investment to earnings is generally negative for firms in civil law and financially undeveloped countries, while the causality is generally positive in common law and financially developed countries. Therefore, our international cross-country study enables us to find that the legal system and financial development are factors in the determination of the profitability of capital investment. Theoretical/Academic Implications: Our findings imply that internal financing is a significant constraint for capital investment, which provides support for the pecking order theory even for financially developed markets and for the free cash flow theory. Common law and financially developed countries tend to provide better shareholder protection with more efficient corporate governance and better investment decisions. Practitioner/Policy Implications: To encourage managers to make capital investments in value-increasing projects, it is important to further improve a legal environment that includes corporate governance, monitoring, and incentive mechanisms. Financial development that includes effective financial regulatory agencies should be sought. [source]

Neural Network Earnings per Share Forecasting Models: A Comparative Analysis of Alternative Methods

DECISION SCIENCES, Issue 2 2004
Wei Zhang
ABSTRACT In this paper, we present a comparative analysis of the forecasting accuracy of univariate and multivariate linear models that incorporate fundamental accounting variables (i.e., inventory, accounts receivable, and so on) with the forecast accuracy of neural network models. Unique to this study is the focus of our comparison on the multivariate models to examine whether the neural network models incorporating the fundamental accounting variables can generate more accurate forecasts of future earnings than the models assuming a linear combination of these same variables. We investigate four types of models: univariate-linear, multivariate-linear, univariate-neural network, and multivariate-neural network using a sample of 283 firms spanning 41 industries. This study shows that the application of the neural network approach incorporating fundamental accounting variables results in forecasts that are more accurate than linear forecasting models. The results also reveal limitations of the forecasting capacity of investors in the security market when compared to neural network models. [source]

Women in the Urban Informal Sector: Perpetuation of Meagre Earnings

DEVELOPMENT AND CHANGE, Issue 2 2005
Arup Mitra
The argument of exploitation of women workers in the labour market notwithstanding, this article examines whether women in India are unable to participate fully in the labour market because they are required to combine their household activities with income yielding jobs. They are constrained to work in the neighbourhood of their residence (the location of the residence having been decided upon by male family members), and can access jobs only through informal contacts (which usually means they end up in jobs similar to those of the contact persons), both of which reduce their bargaining power considerably. The tendency for specialized activities to be concentrated in different geographic locations of a city further restricts the possibility of women workers being engaged in diverse jobs and thus aggravates the situation of an excess supply of labour in a particular activity. Constrained choice, limited contacts of women and physical segmentation of the labour market perpetuate forces that entrap women workers in a low-income situation with worse outcomes than those of their male counterparts. Consequently with greater intensity of work they still continue to receive low wages, while residual participation in the labour market restricts the possibilities of skill formation and upward mobility. All of these factors offer a substantive basis for policy recommendations. [source]

Affirmative Action in Higher Education: How Do Admission and Financial Aid Rules Affect Future Earnings?

ECONOMETRICA, Issue 5 2005
Peter Arcidiacono
This paper addresses how changing the admission and financial aid rules at colleges affects future earnings. I estimate a structural model of the following decisions by individuals: where to submit applications, which school to attend, and what field to study. The model also includes decisions by schools as to which students to accept and how much financial aid to offer. Simulating how black educational choices would change were they to face the white admission and aid rules shows that race-based advantages had little effect on earnings. However, removing race-based advantages does affect black educational outcomes. In particular, removing advantages in admissions substantially decreases the number of black students at top-tier schools, while removing advantages in financial aid causes a decrease in the number of blacks who attend college. [source]

Instrumental Variables Estimates of the Effect of Subsidized Training on the Quantiles of Trainee Earnings

ECONOMETRICA, Issue 1 2002
Alberto Abadie
This paper reports estimates of the effects of JTPA training programs on the distribution of earnings. The estimation uses a new instrumental variable (IV) method that measures program impacts on quantiles. The quantile treatment effects (QTE) estimator reduces to quantile regression when selection for treatment is exogenously determined. QTE can be computed as the solution to a convex linear programming problem, although this requires first-step estimation of a nuisance function. We develop distribution theory for the case where the first step is estimated nonparametrically. For women, the empirical results show that the JTPA program had the largest proportional impact at low quantiles. Perhaps surprisingly, however, JTPA training raised the quantiles of earnings for men only in the upper half of the trainee earnings distribution. [source]

Dynamic pharyngeal collapse in racehorses

EQUINE VETERINARY JOURNAL, Issue S36 2006
A. G. BOYLE
Summary Reason for performing study: Dynamic pharyngeal collapse (PC) is a condition seen in racehorses that can be career-ending. Objectives: To characterise and grade PC and describe the effects of PC on athletic performance. Methods: Medical records were reviewed for 828 horses, of which 49 (6%) records were identified as horses with a primary diagnosis of PC. Tapes of video-endoscopy of the pharynx during exercise were reviewed. Each video recording was assigned a grade (0,4) reflecting the degree of PC and a classification for severity of upper airway obstruction. Earnings per race prior to diagnosis of PC were compared to earnings per race after diagnosis of PC for all horses, as well as performance index (PI). Available exercising arterial blood gases were reviewed for horses with PC. Results: There were 35 (80%) Thoroughbreds (TB), and 9 (20%) Standardbreds (STD). 32 (73%) had a history of making an upper respiratory noise. 4 (9%) grade 1 PC, 8 (18%) grade 2 PC, 26 (59%) grade 3 PC, and 6 (14%) grade 4 PC. Seven (16%) horses were classified as mild PC, 18 (41%) as low-moderate PC, 14 (32%) as high-moderate PC, and 5 (11%) as severe PC. Of 30 horses 11 had abnormally decreased PaO2 and 8 horses had abnormally elevated PaCO2. A significant decrease was found in earnings per race prediagnosis when compared to post diagnosis earnings per race in horses ?4 years of age (P = 0.003). A significant decrease was also observed for earnings per race prediagnosis when compared to post diagnosis earnings per race in horses with grade 3 PC (P = 0.03) No significant differences were observed in PI before or after diagnosis of PC. Conclusions: There was a trend for PC to be observed in more TB than STD, and more males than females compared to the general hospital population. Horses with PC significant had decreases in arterial oxygenation. Racing records after a diagnosis of PC in all horses ?4 years of age suggesting that older horses have a guarded prognosis for continued success. Potential relevance: This study provides a classification system for dynamic pharyngeal collapse and suggests that older racehorses (?4 years of age) diagnosed with PC and all horses with grade 3 PC have a poor prognosis for return to previous level of performance. [source]

Earnings and Equity Valuation in the Biotech Industry: Theory and Evidence

FINANCIAL MANAGEMENT, Issue 3 2008
Philip Joos
We examine how the price-earnings relation varies with the uncertainty about and the quality of a firm's investments. We develop a real option valuation framework to capture investment and abandonment options in the research-intensive biotechnology industry. We hypothesize that the price-earnings relation will be V-shaped and change over the firm's life cycle. We also show how nonfinancial information affects the pricing of earnings. Our empirical findings are based on a sample of 301 biotechnology firms that made IPOs between 1980 and 2000, and are generally consistent with our predictions. [source]

Quantifying the Impact of Option-Based Compensation on Earnings for the 50 Largest U.S.Technology Companies

FINANCIAL MARKETS, INSTITUTIONS & INSTRUMENTS, Issue 4 2002
Noah E. Butensky
First page of article [source]

The Impact of Industrial Restructuring on Earnings Inequality: The Decline of Steel and Earnings in Pittsburgh

GROWTH AND CHANGE, Issue 1 2004
Patricia Beeson
ABSTRACT Inter-industry employment shifts were largely responsible for changes in the income distribution in the Pittsburgh region during the 1980s. Kernel density estimators were used, together with decomposition techniques developed by DiNardo et al. (1996) to show that industry shifts were responsible for over 90 percent of the earnings reductions at some points on the earnings distribution. Most of the losses at the lower end of the distribution occurred in the early 1980s as the economy plunged into a deep recession. The recovery in the later part of the decade brought little improvement as earnings in the lower part of the distribution continued to fall with the increase in employment of part-time workers in the low-wage trade and service sectors. [source]

The Growing Importance of Family: Evidence from Brothers' Earnings

INDUSTRIAL RELATIONS, Issue 1 2007
DAVID I. LEVINE
We examine between-brother correlation of earnings, family income, and wages from two cohorts of the National Longitudinal Surveys. Young brothers who entered the labor market in the 1970s had lower correlations of economic outcomes than did those who entered in the 1980s and early 1990s. Neither the rising brother correlation in education nor the rising return to schooling accounts for much of the increase in the brother correlation in earnings. These results suggest that family and community influences other than years of education that are shared by brothers have become increasingly important in determining economic outcomes. [source]

Simulation of the Impact of the Recognition of Stock Options on the Earnings: The case of Canadian Companies,

ACCOUNTING PERSPECTIVES, Issue 1 2005
SILVA BODJOVA
ABSTRACT One of the most controversial accounting issues pertains to stock compensation. In Canada, the Canadian Institute of Chartered Accountants (CICA) approved section 3870, Stock-based Compensation and Other Stock-Based Payments, on November 13, 2001, to take effect in January 2002. Section 3870 forces companies to "take a look at the real economic cost of most of the stock-based compensation mechanisms" (AcSB Bulletin, October 2001, 1). The adoption of section 3870 was aimed at harmonizing Canadian accounting practice with U.S. standards. The new standard, which was initially based on two American accounting standards - APB Opinion No. 25 and SFAS No. 123 - gave companies the choice of using either the fair value method or the pro forma disclosure of net income and adjusted earnings per share to account for stock-based compensation. The Accounting Standards Board (AcSB) nevertheless recommended that Canadian companies use the fair value method, which consists in estimating and recognizing the value of the stock options at the grant date. [source]

The Earnings of American Jewish Men: Human Capital, Denomination, and Religiosity

JOURNAL FOR THE SCIENTIFIC STUDY OF RELIGION, Issue 4 2008
BARRY R. CHISWICK
This article analyzes the determinants of the earnings of American Jewish men using the 2000/2001 National Jewish Population Survey. Nonresponse to the question on earnings is analyzed. Earnings are related to conventional human capital variables, as well as Jewish-specific variables. Except for the size of place and region variables, the standard human capital variables have similar effects for Jewish men and the general male population. Jewish day schooling as a youth enhances earnings. Earnings vary by denomination, with Jewish men who identify their denomination as Conservative earning the most, with secular and Orthodox Jews earning less. The effect on earnings of religiosity (measured by synagogue attendance) is not monotonic. Earnings are highest for those who attend about once a week, are lower for those who attend daily, and are lowest for those who never attend. [source]

Aggregate Earnings and Asset Prices

JOURNAL OF ACCOUNTING RESEARCH, Issue 5 2009
RAY BALL
ABSTRACT A principal-components analysis demonstrates that common earnings factors explain a substantial portion of firm-level earnings variation, implying earnings shocks have substantial systematic components and are not almost fully diversifiable as prior literature has concluded. Furthermore, the principal components of earnings and returns are highly correlated, implying aggregate earnings risks and return risks are related. In contrast to previous studies, the correlation we report between the systematic components of earnings and returns is stable over time. We also show that the earnings factors are priced, in the sense that the sensitivities of securities' returns to the earnings factors explain a significant portion of the cross-sectional variation in returns, even controlling for return risk. This suggests earnings performance is an underlying source of priced risk. Our evidence that the information sets of returns and earnings are jointly determined implies cash flow risk and return risk are not fully separable, and raises the possibility that it is the common variation of earnings and returns that is priced. [source]

Initial Evidence on the Role of Accounting Earnings in the Bond Market

JOURNAL OF ACCOUNTING RESEARCH, Issue 3 2009
PETER D. EASTON
ABSTRACT We document that: (1) the incidence of bond trade increases during the days surrounding earnings announcements, (2) there is a bond-price reaction to the announcement of earnings, and (3) there is a positive association between annual bond returns and both annual changes in earnings and annual analysts' forecast errors. All of these effects are larger when earnings convey bad news or when the underlying bond is more risky. Taken together, our results suggest that the nonlinear payoff structure of bond securities affects the role of accounting earnings in the bond market. [source]

Analysts' Incentives and Street Earnings

JOURNAL OF ACCOUNTING RESEARCH, Issue 1 2009
BOK BAIK
ABSTRACT We examine whether analysts' incentives are associated with street earnings. Because prior research argues that analysts' incentives to promote stocks increase in the extent to which the stock exhibits glamour characteristics, we predict that analysts are more likely to make income-increasing adjustments in determining street earnings for glamour stocks than for value stocks. We find that analysts are more likely to exclude expense items from street earnings for glamour stocks than for value stocks and that excluded expense items help predict future earnings for glamour stocks but not for value stocks. Overall, our results suggest that analysts' self-interest influences street earnings and this self-interest leads to street earnings that are less useful in predicting future earnings for glamour stocks. [source]

How Much New Information Is There in Earnings?

JOURNAL OF ACCOUNTING RESEARCH, Issue 5 2008
RAY BALL
ABSTRACT We quantify the relative importance of earnings announcements in providing new information to the share market, using the R2 in a regression of securities' calendar-year returns on their four quarterly earnings-announcement "window" returns. The R2, which averages approximately 5% to 9%, measures the proportion of total information incorporated in share prices annually that is associated with earnings announcements. We conclude that the average quarterly announcement is associated with approximately 1% to 2% of total annual information, thus providing a modest but not overwhelming amount of incremental information to the market. The results are consistent with the view that the primary economic role of reported earnings is not to provide timely new information to the share market. By inference, that role lies elsewhere, for example, in settling debt and compensation contracts and in disciplining prior information, including more timely managerial disclosures of information originating in the firm's accounting system. The relative informativeness of earnings announcements is a concave function of size. Increased information during earnings-announcement windows in recent years is due only in part to increased concurrent releases of management forecasts. There is no evidence of abnormal information arrival in the weeks surrounding earnings announcements. Substantial information is released in management forecasts and in analyst forecast revisions prior (but not subsequent) to earnings announcements. [source]

The Persistence and Pricing of the Cash Component of Earnings

JOURNAL OF ACCOUNTING RESEARCH, Issue 3 2008
PATRICIA M. DECHOW
ABSTRACT Prior research shows that the cash component of earnings is more persistent than the accrual component. We decompose the cash component into: (1) the change in the cash balance, (2) issuances/distributions to debt, and (3) issuances/distributions to equity. We find that the higher persistence of the cash component is entirely due to the subcomponent related to equity. The other subcomponents have persistence levels almost identical to accruals. We investigate whether investors understand the implications of the differential persistence of the three subcomponents. Our results suggest that investors correctly price debt and equity issuances/distributions but misprice the change in the cash balance in a similar manner to accruals. Our tests enable us to empirically distinguish the "accrual" and "external financing" anomalies with results implying that the accrual anomaly subsumes the external financing anomaly. Our results also suggest that naive fixation on earnings is unlikely to be a complete explanation for the accrual anomaly. Our findings are more consistent with investors misunderstanding diminishing returns to new investments. [source]

An Analysis of the Relation between the Stewardship and Valuation Roles of Earnings

JOURNAL OF ACCOUNTING RESEARCH, Issue 1 2006
ROBERT BUSHMAN
ABSTRACT In this paper, we seek a deeper understanding of how accounting information is used for valuation and incentive contracting purposes. We explore linkages between weights on earnings in compensation contracts and in stock price formation. A distinction between the valuation and incentive contracting roles of earnings in Paul [1992] produces the null hypothesis that valuation earnings coefficients (VECs) and compensation earnings coefficients (CECs) are unrelated. Our empirical analyses of the relations between earnings and both stock prices and executive compensation data at the firm and industry levels over the period 1971,2000 rejects Paul's [1992] hypothesis of no relation. We also document an increasing weight over time on other public performance information captured by stock returns in the determination of cash compensation. Specifically, we find that the incentive coefficient on returns is significantly higher in the second of two equal sample subperiods relative to the incentive coefficient on earnings. [source]

Domestic and Foreign Earnings, Stock Return Variability, and the Impact of Investor Sophistication

JOURNAL OF ACCOUNTING RESEARCH, Issue 3 2005
JEFFREY L. CALLEN
ABSTRACT We examine the importance of foreign earnings relative to domestic earnings for a sample of U.S. multinationals using variance decomposition. Our methodology represents an alternative and complementary approach over the prior literature, which is based on traditional regressions and earnings response coefficients. We document that domestic earnings are more important in explaining the variance of unexpected returns than are foreign earnings and that the relative importance of domestic earnings is a decreasing function of investor sophistication. Last, we classify institutional investors as either short- or long-term oriented following Bushee [1998]. We find that the variance contribution of foreign earnings increases with the level of investment by long-term investors. In contrast, there is no significant relation between the degree of ownership by short-term (or transient) investors and the variance contribution of domestic and foreign earnings. Overall, our results are consistent with Thomas's [1999] finding that investors on average underestimate the persistence of foreign earnings. [source]

Earnings Management through Transaction Structuring: Contingent Convertible Debt and Diluted Earnings per Share

JOURNAL OF ACCOUNTING RESEARCH, Issue 2 2005
CAROL MARQUARDT
ABSTRACT In this article we examine whether firms structure their convertible bond transactions to manage diluted earnings per share (EPS). We find that the likelihood of firms issuing contingent convertible bonds (COCOs), which are often excluded from diluted EPS calculations under Statement of Financial Accounting Standard (SFAS) 128, is significantly associated with the reduction that would occur in diluted EPS if the bonds were traditionally structured. We also document that firms' use of EPS-based compensation contracts significantly affects the likelihood of COCO issuance and find weak evidence that reputation costs, measured using earnings restatement data, play a role in the structuring decision. These results are robust to controlling for alternative motivations for issuing COCOs, including tax and dilution arguments. In addition, an examination of announcement returns reveals that investors view the net benefits and costs of COCOs as offsetting one another. Our results contribute to the literature on earnings management, diluted EPS, financial reporting costs, and financial innovation. [source]

Do Stock Prices Fully Reflect the Implications of Special Items for Future Earnings?

JOURNAL OF ACCOUNTING RESEARCH, Issue 3 2002
David Burgstahler
Previous research (Rendleman, Jones, and Latane [1987]; Freeman and Tse [1989]; Bernard and Thomas [1990]; and Ball and Bartov [1996]) indicates that security prices do not fully reflect predictable elements of the relation between current and future quarterly earnings. We investigate whether this finding also holds for the special items component of earnings. Given that special items are prominent in financial analysis and are assumed to have relatively straightforward implications for future earnings (special items are assumed to be largely transitory), one might expect that prices would fully impound the implications of special items for future earnings. Based on the "two-equation" approach used in Ball and Bartov [1996] and other studies (e.g., Abarbanell and Bernard [1992]; Sloan [1996]; Rangan and Sloan [1998]; and Soffer and Lys [1999]), we find that while prices reflect relatively more of the effects of special items compared to other earnings components, we still reject the null hypothesis that prices fully impound the implications of special items for future earnings. The "two-equation" approach assesses the consistency of coefficients in a pair of prediction and pricing equations, and thus depends on an assumed functional form. However, a less structured abnormal returns methodology like that used in Bernard and Thomas [1990] also supports the conclusion that the implications of special items are not fully impounded in prices. Specifically, a trading strategy based only on the sign of special items earns small but statistically significant abnormal returns during a 3-day window four quarters subsequent to the original announcement of special items. [source]