Earnings differences between Chinese and Indian wage earners, 1987-2004

This paper is one of the first comprehensive attempts to compare earnings in urban China and India over the recent period. While both economies have grown considerably, we illustrate significant cross-country differences in wage growth since the late 1980s. For this purpose, we make use of comparable datasets, estimate Mincer equations and perform Oaxaca–Blinder decompositions at the mean and at different points of the wage distribution. The initial wage differential in favor of Indian workers, observed in the middle and upper part of the distribution, partly disappears over time. While the 1980s Indian premium is mainly due to higher returns to education and experience, a combination of price and endowment effects explains why Chinese wages have caught up, especially since the mid-1990s. The price effect is only partly explained by the observed convergence in returns to education; the endowment effect is driven by faster increase in education levels in China and significantly accentuates the reversal of the wage gap in favor of this country for the first half of the wage distribution.

Does move to market have an impact on earnings gap across gender? Some evidence from India

We use Indian National Sample Survey employment–unemployment data for the urban sector for the years 1987 and 1999. Our results indicate that the gender wage gap had narrowed considerably between these two years, for all earnings deciles and for all education cohorts. The narrowing of the earnings gap can be attributed largely to a sharp increase in the returns to the labour market experience of women.

Loan loss provisions, earnings management and capital management under IFRS:the case of EU commercial banks

Prior research has shown that loan loss provisions are primarily used as a tool for earnings management and capital management by listed banks. Effective 2005 all listed companies in the European Union (EU) are required to comply with International Financial Reporting Standards (IFRS). Adherence to IFRS, it is claimed, should enhance transparency of reporting practices relative to local General Accepted Accounting Principles (GAAP). The overall objective of this paper is to examine the impact of the implementation of IFRS on the use of loan loss provisions (LLPs) to manage earnings and capital. We use a sample of 91 EU listed commercial banks covering a period of 10 years (before and after implementation of IFRS). Since early adopters may have different incentives and motivations relative to those who adopt mandatorily, we dichotomize our sample into early and late adopters. Overall, we find that earnings management (using loan loss provisions) for both early and late adopters while significant over the estimation window is significantly reduced after implementation of IFRS. We also find that, for risky banks, earnings management behavior is more pronounced when compared to the less risky banks, but is significantly reduced in the post IFRS period. Capital management behavior by bank managers is not significant in both pre and post IFRS regimes. Overall, we conclude that the implementation of IFRS in the EU appears to have improved earnings quality by mitigating the tendency of bank managers of listed commercial banks to engage in earnings management using loan loss provisions.

Corporate social responsibility and earnings management in U.S. banks

Business decision making depends on financial reporting quality. In identifying the drivers of financial reporting quality, proxied by earnings management (EM), prior literature has drawn attention to the association between corporate EM practices and commitment to corporate social responsibility (CSR). Empirical evidence, however, provides inconclusive results regarding the direction of this association. Using simultaneous equations, we examine the bi-directional CSR-EM relationship in U.S. commercial banks. We demonstrate that, although banks that engage in EM practices are also actively involved in CSR, the reverse relationship is not significant. We provide implications for investors, analysts, business participants and regulators. © 2014 Elsevier Ltd.

Distress risk, growth and earnings quality

We extend and complement prior work by investigating the earnings quality of firms with different financial health characteristics and growth prospects. By using three alternative measures of default likelihood and two alternative measures of growth options, without being limited to a specific event, we provide a more comprehensive setup for analysing the earnings characteristics of the universe of firms than examining distressed firms with persistent losses, dividend reductions or bankruptcy-filings. Our dataset consists of 15,049 healthy U.S. firms over the period 1990-2004. Results show that the relation between earnings quality and financial health is not monotonic. Distressed firms have a low level of earnings timeliness for bad news and a high level for good news, and manage earnings toward a positive target more frequently than healthy firms. On the other hand, healthy firms have a high level of earnings timeliness for bad news. Growth aspects play an important role in a firm's ability to manage earnings. In contrast to the findings of prior studies, growth firms have greater earnings timeliness for bad news, whereas value firms manage earnings toward a positive target more frequently than growth firms. © 2011 The Authors. Abacus© 2011 Accounting Foundation, The University of Sydney.

Losses, dividend reductions, and market reaction associated with past earnings and dividends patterns

This paper examines investors' reactions to dividend reductions or omissions conditional on past earnings and dividend patterns for a sample of eighty-two U.S. firms that incurred an annual loss. We document that the market reaction for firms with long patterns of past earnings and dividend payouts is significantly more negative than for firms with lessestablished past earnings and dividends records. Our results can be explained by the following line of reasoning. First, consistent with DeAngelo, DeAngelo, and Skinner (1992), a loss following a long stream of earnings and dividend payments represents an unreliable indicator of future earnings. Thus, established firms have higher loss reliability than less-established firms. Second, because current earnings and dividend policy are a substitute source of means of forecasting future earnings, lower loss reliability increases the information content of dividend reductions. Therefore, given the presence of a loss, the longer the stream of prior earnings and dividend payments, (1) the lower the loss reliability and (2) the more reliably dividend cuts are perceived as an indication that earnings difficulties will persist in the future.

The effect of past earnings and dividend patterns on the information content of dividends when earnings are reduced

This study pursues two objectives: first, to provide evidence on the information content of dividend policy, conditional on past earnings and dividend patterns prior to an annual earnings decline; second, to examine the effect of the magnitude of low earnings realizations on dividend policy when firms have more-or-less established dividend payouts. The information content of dividend policy for firms that incur earnings reductions following long patterns of positive earnings and dividends has been examined (DeAngelo et al., 1992, 1996; Charitou, 2000). No research has examined the association between the informativeness of dividend policy changes in the event of an earnings drop, relative to varying patterns of past earnings and dividends. Our dataset consists of 4,873 U.S. firm-year observations over the period 1986-2005. Our evidence supports the hypotheses that, among earnings-reducing or loss firms, longer patterns of past earnings and dividends: (a) strengthen the information conveyed by dividends regarding future earnings, and (b) enhance the role of the magnitude of low earnings realizations in explaining dividend policy decisions, in that earnings hold more information content that explains the likelihood of dividend cuts the longer the past earnings and dividend patterns. Both results stem from the stylized facts that managers aim to maintain consistency with respect to historic payout policy, being reluctant to proceed with dividend reductions, and that this reluctance is higher the more established is the historic payout policy. © 2010 The Authors. Journal compilation © 2010 Accounting Foundation, The University of Sydney.

Earnings and hindsight bias:an experimental study

We conduct prediction experiments where subjects estimate, and later reconstruct probabilities of up-coming events. Subjects also value state-contingent claims on these events. We find that hindsight bias is greater for events where subjects earned more money

Earnings management using estimates and the timing of adoption of accounting standards: An empirical examination of pensions

This study investigates the relationship between adoption timing of Statement of Financial Accounting Standards 87 and earnings management after adoption. Earnings management, defined consistent with Schipper (1989), is tested through hypotheses using (1) a portfolio approach and (2) pension rates. One Hypothesis uses a Modified Jones (1991) Model as a proxy for discretionary accruals and the other uses pension rate estimates.^ Statistically significant relationships are found between adoption timing and (1) discretionary accruals and (2) estimated rate-of-return (ROR) on pension plan assets. Early adopting firms tend to have lower discretionary accruals after adoption than on-time adopters. They also tend to use higher ROR estimates which are not supported by higher actual returns. Thus, while early adopters may be using ROR to manage income, this tends to not result in higher discretionary accruals. ^

Education, earnings, and rates of return: The case of Taiwan

Educational planners and economists have long recognized the importance of education as a form of productive investment in both advanced countries and developing countries. In the case of Taiwan, along with impressive economic growth, there was an even faster rate of growth of the government's investment in education. This leads some to question whether education has any role in economic development. ^ The purpose of this study is to provide a broad overview of the role of education, in terms of private rates of return to education, in Taiwan. In the process, a variety of hypotheses about human capital theory are examined and an empirical study of Taiwan's earnings functions are tested to show that education can be an important instrument to increase private rate of return, even under conditions of scarcity of natural and physical resources. Data was collected using the Manpower Survey and Manpower Utilization Survey, conducted by the government. Research questions were analyzed using descriptive statistics, frequencies, and regression analysis. ^ Results indicated that the Manpower Development Plans have been the decisive influence in allowing Taiwan to develop its human resources and achieve success in meeting the needs of Taiwan's economy. The structure of age-earnings profiles showed a strong relationship between earnings and education, and the profiles that successively shift upward are associated with higher levels of education. In the cross-sectional results of the rate of return in 1997, each additional year of schooling leads to a 6.2% increase in income. As to the private rates of return to different levels of education, the results found that the private rates of return are 2.88%, 4.85% and 10.05% for primary, secondary and higher education respectively. In an intertemporal comparison for 1980, 1985, 1990 and 1997, the results showed no significant trend except the private rates of return for primary education have been falling from 3.9% to 2.88%. ^ On the basis of this study, for individual student or family in Taiwan, there is likely to be a strong demand for education, particularly at the higher level. Therefore, a well-developed higher educational level becomes essential and the content of curriculum in higher education becomes another crucial question facing planners in Taiwan if they are going to use education as a means to foster economic development. ^

Performance Related Pay, Efficiency Wages and the Shape of the Tenure-Earnings Profile

Peer reviewed

Impact of financial crisis on earnings management in listed companies of Portugal and UK

Firm’s financial information is essential to stakeholders’ decision making. Although not always financial statements show the firm’s real image. This study examines listed firms from Portugal and UK. Firms have different purposes to manipulate earnings: some strive for influencing investors’ perception about a particular company, some try to provide better position for gaining finance from credit institutions or paying less tax to tax authorities. Usually, this behaviour is induced when firms have financial problems. Consequently, the study also aims to see the impact of financial crisis on earnings management. We try to answer question how does extent of firms’ involvement in earnings management change when the world undergoes financial crisis. Furthermore, we also compare two countries with different legal forces in terms of quality of accounting to see the main differences. We used a panel data methodology to analyse financial data from 2004 till 2014 of listed firms from Portugal and UK. Beneish (1999) model was applied to categorize manipulator and non-manipulator firms. Analysing accounting information according to Beneish’s ratios, findings suggest that financial crisis had certain impact on firms’ tendency to manipulate financial results in UK although it is not statistically significant. Moreover, besides the differences between Portugal and UK, results contradict the common view of legal systems’ quality, as UK firms tend to apply more accounting techniques for manipulation than the Portuguese ones. Our main results also confirm that some UK firms manipulate ratios of receivables’ days, asset quality index, depreciation index, leverage, sales and general administrative expenses whereas Portuguese firms manipulate only receivables’ days. Finally, we also find that the main reason to manipulate results is not to influence the cost of obtained funds neither to minimize tax burden since net profit does not explain the ratios used in the Beneish model. Results suggest that the main concern to listed firms manipulate results is to influence financial investors perception.

Minorities, Measured Cognitive Skills and the Earnings of Canadians (Working Paper 26)

This paper uses the Statistics Canada Survey of Literacy Skills in Daily Use (LSUDA) to investigate minority-“white”(i.e., non-minority) income differences and the role education and English/French literacy and numeracy skills play in those patterns. There are three principal sets of findings. First, among males, some visible minority groups have substantially lower levels of the measured language and number skills than whites and other more economically successful minorities, and in some cases these differences play a significant role in explaining the observed income patterns. The minority-white income gaps are, however, much smaller for women, and the literacy and numeracy variables do not have much of a role to play in explaining those differences. Second, for men, the minority-white income gaps are largely confined to immigrants, and there are no significant differences amongst the native-born once various factors which affect incomes (including education and the literacy and numeracy measures) are taken into account. For women, though, minority-white income differences only emerge for certain Canadian-born groups when they are differentiated from immigrants, for whom different gaps become apparent. Finally, the measured returns to literacy and numeracy differ significantly by ethnic group and sex. Various implications of the findings are discussed.