Do welfare‐to‐work programmes work for long?

Evidence that welfare‐to‐work programmes in the USA succeed in boosting welfare recipients' earnings at modest cost has helped shape policy in Britain since 1997. So too has the belief that programmes that prioritise moving people into work quickly are more effective than ones that seek to enhance human capital. However, there is little evidence on how long the beneficial effects of programmes persist after individuals leave them. The analysis reported draws on the experience of 64 US welfare‐to‐work programmes that have all been evaluated using random assignment. It concludes that, on average, these programmes have a positive effect on participants' earnings for five to six years. The effects of ‘work first’ interventions are most marked early on and decline more rapidly than those of programmes emphasising human capital. Nevertheless, work first interventions typically increase earnings received over six years by more than two‐and‐a‐half times that achieved by human capital approaches.     

How Taxes and Welfare Benefits Affect Work Incentives: A Life‐Cycle Perspective

Personal taxes and benefits affect the incentive to work over the life cycle by altering income–age profiles, insuring against adverse shocks and changing the returns to human capital. In this paper, we show how a life‐cycle perspective alters our impression of how the UK tax and benefit system affects women's work incentives. Given that actual longitudinal data conflate age effects, cohort effects and policy effects, and, in the UK, are not available covering the full life cycle, we use simulated data produced by a rich, dynamic structural model of female labour supply and human capital that incorporates family formation and fertility. We find that individuals experience considerable variability in work incentives across life that outweighs the variability across individuals. Changes in the presence of children and a partner, as well as the level of any partner's earnings, are key to explaining these patterns: work incentives vary dramatically depending on family composition and the earnings of any partner, especially for the lower‐skilled, and most women experience a number of different family types during the course of their lives.     

The stock price effects of changes in dispersion of investor beliefs during earnings announcements

Existing research provides competing theories about how dispersion of investor beliefs might affect stock prices. We measure changes in dispersion of investor beliefs around earnings announcements using changes in the dispersion of individual analysts’ forecasts. We find that the 3-day market response to earnings announcements is negatively associated with changes in dispersion, consistent with the cost of capital hypothesis. The results hold after controlling for the current earnings surprise, forecast revisions of future earnings, and reported earnings relative to various earnings thresholds. Our study provides new insight about the information contained in earnings announcements that is incremental to the magnitude and timing of cash flows.     

The Impact of SFAS No. 114 on the Linear Information Dynamic for Commercial Banks

Increase (decrease) in loan loss provisions would decrease (increases) bank earnings, but increase (decreases) regulatory capital. Previous studies have separately documented earnings and capital management behavior via loan loss provisions by commercial banks. However, it is difficult to isolate a bank's demand for increasing earnings from its demand for regulatory capital because earnings is a source of capital. Based on the objective bank function, this study investigates the impact of SFAS No. 114 on the information content of loan loss provisions in relation to both earnings quality and capital adequacy in a linear information dynamic framework. Test results show that the association between market value with loan loss provisions became significantly stronger for commercial banks in the post- than in the pre-adoption period. As a result, SFAS No. 114 is also found to positively affect the association of market value with both bank earnings and regulatory capital through the clean surplus relation because of the higher value relevance of loan loss provisions. The findings thus provide empirical evidence that SFAS No. 114 has significantly complemented banking regulations in enhancing (reducing) the (dispersion from the) accounting measurement construct of loan loss provisions.     

Book-tax conformity and capital structure

We examine the effect of increased book-tax conformity on corporate capital structure. Prior studies document a decrease in the informativeness of accounting earnings for equity markets resulting from higher book-tax conformity. We argue that the decrease in earnings informativeness impacts equity holders more than debt holders because of the differences in payoff structures between debt and equity investments such that increases in book-tax conformity lead to increases in firms’ reliance on debt capital. We exploit a natural experiment in the U.S. and find that firms facing an increase in required book-tax conformity increase leverage relative to other firms. We also provide evidence of an increase in the cost of equity (but not of debt) capital for firms facing an increase in required book-tax conformity, relative to control firms, and show that these increases in cost of equity capital are positively associated with an increase in leverage. Our findings are consistent with firms substituting away from equity and toward more debt in the presence of higher book-tax conformity.     

The effect of internal control and risk management regulation on earnings quality: Evidence from Germany

We investigate the impact of mandatory internal control and risk management (ICRM) reform on earnings-based attributes of accounting quality in Germany. Although prior studies examine changes in accounting quality under SOX Sections 302 and 404, there is scant evidence of the accounting quality effects of ICRM reform in foreign jurisdictions. Such evidence is warranted given the ongoing global policy debate of ICRM reform in the post-SOX era. We extend existing research by examining changes in earnings quality following the 1998 German legislation on control and transparency (KTG). The KTG regime provides a unique setting in which the regulatory scope extends beyond internal control over financial reporting (ICFR) to include broad business and enterprise risk control. Using both a differences and difference-in-differences research design, we find that German firms experience an increase in timely loss recognition and a decrease in earnings smoothing after KTG. We also find some evidence of a decrease in loss avoidance behavior. Additional analyses show that the sensitivity of capital investment efficiency to earnings quality increases in the German market after KTG, suggesting that earnings quality effects of mandatory ICRM reform has positive consequences for capital resource allocation. Together, our results are consistent with the achievement of one of the intended outcomes of ICRM regulation—increased accounting quality through effective ICRM systems.     

Information asymmetry,mutual funds and earnings management: Evidence from China

This paper investigates how information asymmetry and mutual fund ownership affect listed companies’ earnings management. We show that (1) reducing information asymmetry improves firms’ earnings management behavior; (2) relative to short-term mutual funds, long-term mutual funds promote earnings quality by adopting a monitoring role; and (3) by dividing firms into high/low information asymmetry groups, we find that the information environment significantly increases the effect of long-term mutual funds on firms’ earnings management. In this paper, we provide new evidence for the role that institutional investors play in a typical emerging capital market. Our results have clear policy implications: to increase earnings quality, it is essential to improve information transparency and develop long-term institutional investors.     

Bank earnings and regulatory capital management using available for sale securities

Based on a large sample of publicly listed and non-listed US commercial banks from 1996 to 2011, we find robust evidence consistent with banks using realized available for sale (AFS) securities gains and losses to smooth earnings and increase low regulatory capital. We also find that (i) banks with positive earnings smooth earnings, and banks with negative earnings generally take big baths; (ii) regulatory capital constrains big baths; (iii) banks with more negative earnings and more unrealized beginning-of-quarter losses (gains) take big baths (smooth earnings); and (iv) banks with low regulatory capital and more unrealized gains realize more gains. Also, banks with negative earnings take big baths (avoid or reduce the earnings loss) if their unrealized gains are insufficient (sufficient) to offset the negative earnings. Our inferences apply to listed and non-listed banks, which indicates that the earnings management incentives do not derive solely from public capital markets. Our findings reveal that the accounting for AFS securities gains and losses enables banks to manage regulatory capital and earnings in a variety of ways.     

IAS 39 reclassification choice and analyst earnings forecast properties

In October 2008, the International Accounting Standards Board amended IAS 39 to allow banks to retroactively reclassify financial assets that previously were measured at fair value to amortized cost. By reclassifying financial assets, a bank can potentially avoid recognizing the unrealized fair value losses and thereby increase its income and regulatory capital during a market downturn. We examine the implications of the reclassification decision by banks for the properties of financial analyst earnings forecasts during 2008–2009, when economic conditions were highly volatile. We find that the reclassification choice during the financial crisis reduced analyst forecast accuracy and increased forecast dispersion. We also find that the observed decline in analyst forecasting ability is limited to the year of adoption when the economic environment was highly volatile.     

Are more able managers good future tellers? Learning from Japan

Baik et al. (2011) find that high-ability managers in the U.S. are more likely to issue accurate management earnings forecasts. Focusing on Japan, where management earnings forecasts are effectively mandated, we extend the literature by exploring (1) whether the relationship between managerial ability and forecast accuracy is unique to the U.S. disclosure system, where management forecasts are voluntary, and (2) how high-ability managers increase their forecast accuracy. We find that managerial ability is negatively associated with forecast errors based on initial forecasts, suggesting that high-ability managers are more likely to issue accurate forecasts at the beginning of the fiscal year. We then show that high-ability managers are less likely to revise their initial earnings forecasts and less likely to use earnings management to improve the accuracy of their earnings forecasts. Our findings show that, while high-ability managers are more likely to issue accurate initial management forecasts, low-ability managers are more likely to revise their forecasts and conduct earnings management to reduce their forecast errors.     

The effect of CEO ownership on the information content of reported earnings

This paper examines the relation between capital market perceptions of earnings quality and CEO equity ownership. Using the earnings response coefficients (ERCs) from annual returns–earnings regressions as a proxy for investor perceptions of earnings quality, we find that ERCs first increase and then decline across higher levels of CEO ownership with an inflection point around 25% ownership. Using analyst behavior as another proxy for the perceptions of financial analysts, we find that earnings forecasts are more accurate as ownership increases, but once ownership levels reach about 25%, accuracy declines with further increases in ownership. Forecast dispersion, forecast revision volatility, and analyst following decline and then increase across increasing levels of CEO ownership. Our results suggest that, for low levels of CEO ownership, earnings are perceived as being more informative about future firm performance as ownership increases. However, once ownership levels are high, earnings are perceived as being less informative with further increases in ownership.     

盈余管理与所得税支付：基于会计利润与应税所得之间差异的研究

公司在进行盈余管理时,往往面临着财务报告成本与税务成本的权衡。为了摆脱该困境,公司有动机通过操纵非应税项目损益,以规避盈余管理的所得税成本。本文通过考察会计利润与应税所得差异(Book-Tax Differences)和盈余管理之间的关系,证实了该假设。我们的研究表明,上市公司盈余管理幅度越大,则会计利润与应税所得差异(本文定义为非应税项目损益)也越高,即上市公司通过操纵非应税项目损益,以规避盈余管理的税负成本。我们的研究进一步发现,上市公司通过非应税项目损益规避盈余管理税负成本的行为主要发生在高税率组别,而享受所得税优惠的公司则没有呈现出该特征。另外,我们的研究还发现,上市公司主要通过操纵长期应计项目规避所得税负。但我们的研究也表明,上市公司通过非应税项目损益规避的盈余管理税负成本较为有限,平均每1元操纵利润中,只有1．8分的操纵利润可以规避所得税成本,这或许表明进行盈余管理的公司为了避免引起资本市场或税务当局的怀疑,而为其大部分利润操纵支付了所得税成本。此外,本文研究还发现,高税率公司存在强烈的通过非应税掼益项目规避所得税的动机。我们的样本公司中,平均而言,所得税税率每增加1个百分点,操纵非应税项目损益占资产的比例将增加0．029％;适用33％税率的公司与适用15％优惠税率的公司相比,为此所规避的所得税成本平均高达330万元。     

Employee turnover likelihood and earnings management: evidence from the inevitable disclosure doctrine

We present evidence that managers consider employee turnover likelihood in their accounting choices. Our tests exploit U.S. state courts’ staggered recognition of the inevitable disclosure doctrine (IDD), which reduces employees’ ability to switch employers. We find a significant decrease in upward earnings management for firms headquartered in states that recognize the IDD, relative to firms headquartered elsewhere. The effect of the IDD is stronger for firms relying more on human capital and for firms whose employees have higher ex-ante turnover likelihood, confirming the employee retention channel. Overall, our results support the view that retaining employees is an important motive for corporate earnings management.     

Management earnings forecast disclosure policy and the cost of equity capital

We examine the relation between management earnings forecast disclosure policy and the cost of equity capital in a cross-section of 1,355 firms over a 4-year post-Regulation Fair Disclosure period (2001 through 2004). We find evidence of a negative association between the quality of management earnings forecasting policy and cost of equity capital, and we document that the strength of the association is greater for firms with higher disclosure costs and for firms with more relevant quarterly management earnings forecasts. Our results are robust to the use of multiple methods to address both endogeneity and the measurement error in firm-specific estimates of implied cost of equity capital.     

On the relationship between concentration of prospect theory/mental accounting investors,cointegration, and momentum

We examine the role of cointegration between stock prices and their estimated fundamental values in return momentum. We find that the positive relationship between capital gains overhang and future stock returns in Grinblatt and Han (2005) is significantly stronger among the “non-cointegrated” group of stocks as compared with the “cointegrated” group of stocks. Further, for the cointegrated stocks, the slower the speed of adjustment to the cointegrating equilibrium, the greater (smaller) is the future return of stocks with unrealized capital gains (losses). These findings are robust to various firm characteristics including firm size, book-to-market ratio, past returns, idiosyncratic volatility, dispersion in analysts’ earnings forecasts, turnover, individual investor ownership, and industry returns.     

Does trading volume detect information content in earnings reconciliations of foreign firms?

Currently, foreign firms trading securities on U.S. markets provide periodically a quantitative reconciliation of selected financial data consistent with U.S. GAAP (hereafter referred to as reconciled information) in Form 20-F. The SEC is examining whether users believe that this reconciliation process provides additional information above that provided by the foreign GAAP earning announcement and whether this incremental information enhances usefulness for market participants. We examine whether the reconciliation affects a primary indicator of information usefulness: the trading volume of capital markets participants.We use a regression model to examine the relation between a measure of abnormal trading volume and four firm-specific variables in the firm's information environment: similarities of accounting systems, analyst following, difference between reconciled earnings and foreign GAAP earnings, and dispersion of analysts’ expectations. We find a significant relation between abnormal volume and the reconciled earnings number and between abnormal volume and the dispersion of analysts forecasts. Our findings suggest that market participants may use the 20-F reconciliation in trading decisions.     

THE ROLE OF LOAN LOSS PROVISIONS IN EARNINGS MANAGEMENT,CAPITAL MANAGEMENT,AND SIGNALING: THE SPANISH EXPERIENCE

While much research has been conducted in the United States on the use of loan loss provisions (LLPs) as a mechanism for managing earnings, managing capital, and as a tool for signaling future earnings strategies, there is a paucity of research in Europe. In this research, we replicate methodology used by Ahmed, Takeda and Thomas (1998) and examine the relative importance of key factors affecting the LLP decisions of Spanish depository institutions. Among others, we focus on the role of organizational structure. We specifically examine if and how LLPs are used prior to and after the implementation of capital adequacy regulations in the Spanish depository industry in 1992. Our results indicate that while LLPs were not used as a tool for managing capital after the new regulation came into effect, banks have now adopted a more aggressive earnings management strategy. This appears to be because the capital adequacy regulation of 1992 removed any capital constraint that hitherto acted as a disincentive to aggressive earnings management. Commercial banks appeared to adopt a more aggressive earnings management as well as capital management strategy than savings banks in the post regulatory era. Finally, we did not find evidence that LLPs were used as a signaling tool by Spanish banks to portray their intentions about future earnings.     

More than meets the eye: Convertible bond issuers' concurrent transactions

We document that, in recent years, over 60% of convertible bond issuers conduct concurrent transactions including share repurchases, call option purchases, warrant sales, seasoned equity offerings, and stock lending program initiations. We investigate the determinants of issuers' choice of concurrent transactions and find that a proxy for capital supply (flows to convertible bond arbitrage hedge funds) is a significant determinant. Option purchases are more likely when capital supply is low and the convertible is dilutive to earnings. SEOs are more likely when firms have valuable growth opportunities and capital supply is low. Convertible issuers establish lending programs when arbitrageurs likely encounter difficulty shorting their stock, suggesting that these firms facilitate short selling in their own stock. These results suggest that, in the convertible bond market, the influence of capital supply extends beyond the issuance decision to the use of concurrent transactions and that these transactions offer important flexibility to issuers. We find that average equity market announcement effects differ when issuers conduct concurrent transactions. Consistent with models of adverse selection, concurrent transactions that reduce the dilutive impact on earnings, thereby making the design more debt-like, are associated with less negative announcement effects. Conversely, concurrent transactions that increase the dilutive impact on earnings, thereby making the design more equity-like, are associated with more negative announcement effects.     

The Association of R&D and Capital Expenditures with Subsequent Earnings Variability

Abstract:  We estimate the association of investments in R&D and in physical assets (CAPEX) with subsequent earnings variability. We estimate these relations in different time periods and across industries. We find that R&D contributes to subsequent earnings variability more than CAPEX only in relative R&D-intensive industries – industries in which R&D is relatively more intensive than physical capital. In physical assets-intensive industries, we do not find similar relations. The findings suggest that with respect to subsequent earnings variability, fundamental differences between investment information about R&D and CAPEX exist. However, they are mainly noticeable in firms that operate in relatively R&D-intensive industries. The evidence also suggests there was a shift in the relations between R&D and CAPEX over time. Our findings contribute to the debate on accounting for R&D expenditures.