Earnings Distribution Research Articles

A Bayesian approach of the consequence of failure on inequality acceptance: Experimental evidence

AbstractIn this paper, we design a two‐stage experiment and a tractable model. The first stage is a tournament, and the second stage involves a hierarchical relationship where the loser of the tournament must declare what they think is an acceptable earnings distribution to have an incentive to work for the winner. We use a Becker–Degroot–Marschak (BDM) procedure to elicit the acceptable earnings distribution. We show that failure in the tournament could decrease the willingness to accept wage inequality and that this behavior relies on Bayesian updating. We identify a “fresh start” effect: When the asset required to win the tournament is not the same as the asset that the loser uses to produce after failure, inequality acceptance is higher.

Trickle-down revisited

Abstract:In this paper I discuss what can be learned about ‘trickle-down’ ideas from recent empirical evidence on tax incidence, or the effect of tax policies on the distribution of welfare. I underscore three lessons. First, recent research suggests that business income taxes affect the earnings of workers, but these effects largely derive from taxing rents and rent-sharing, highlighting the importance of these channels for determining the ultimate incidence. Second, when workers are affected by these taxes, the burden is not borne equally by all workers, but predominantly by those at the top of the earnings distribution. Third, across different tax policies that statutorily affect the rich, the burden is largely borne by the rich, but heterogeneity in responses across tax incentives and taxpayers provides context for incidence analyses. Throughout, I discuss the value of analysing heterogeneous responses, particularly how tax incidence depends on labour markets, product markets, and tax systems.

IS THERE EARNINGS DISCONTINUITY AFTER THE IMPLEMENTATION OF IFRS IN NIGERIA?

Earnings metrics are major financial indicators which capital market participants and investors focus on for informed decisions. Because reporting earnings increase may enhance firms’ stock price, many managers are motivated to avoid reporting earnings decreases, but prefer to consistently report increase earnings greater than its previous valuation. There is evidence that such practice has led to a situation of conspicuous upward shift in frequency of observations, starting from the left of identified earnings benchmark to the right. Recent studies have shown that a change in accounting regulation may have effects on the shape of the firm-year distribution of earnings. This paper examines the discontinuity evidence for Nigeria, in relation to the adoption of the international financial reporting standard. The aim is to establish whether discontinuity in earnings, represented by the asset-scaled net profits, as well the discontinuity in earnings-change, has reduced following the adoption. According to literature, the study employs three methods – empirical histogram, standardise differences tests and the permutation tests – to validate the aims. The findings suppose evidence for increase in discontinuity, indicating increased in small profits’ earnings management, after the adoption. Contrary, the evidence is not sufficient to conclude that the discontinuity has increase for the earnings-change. It can be argued that the adoption has not achieve much in ensuring firms are monitored against earnings management to avoid losses. The study has limitation, since it considers only the distributions of earnings and earnings-changes. The distribution of forecast errors is not investigated because such is influence by forecast management. Future studies may consider this for improvement.

The labor market outcomes of bilinguals in the United States: Accumulation and returns effects.

At least half of the world population is bilingual, but lifetime financial gains from early exposure to multiple languages are largely unknown. In this study, we analyze individual earnings of bilinguals in the US using 15 years of Census data and an augmented wage model, accounting for cognitive, manual, and interpersonal skills derived from O*NET job task descriptors via sparse principal component method. Using unconditional quantile regression, we find evidence that language skills mostly benefit individuals at the lower end of the earnings distribution. While our analysis does not establish causality, it underscores the potential of early language acquisition to mitigate income inequality by enhancing the employment prospects of low-income individuals. We also highlight the favorable cost-benefit ratio of language acquisition in childhood, when learners face no monetary opportunity costs and can achieve greater levels of fluency.

Beyond the mean: Distributional differences in earnings and mental health in young adulthood by childhood health histories

Research on the long-term effects of health in early life has predominantly relied on parametric methods to assess differences between groups of children. However, this approach leaves a wealth of distributional information untapped. The objective of this study was to assess distributional differences in earnings and mental health in young adulthood between individuals who suffered a chronic illness in childhood compared to those who did not using the non-parametric relative distributions framework. Using data from the Panel Study of Income Dynamics, we find that young adults who suffered a chronic illness in childhood fare worse in terms of earnings and mental health scores in adulthood, particularly for individuals reporting a childhood mental health/developmental disorder. Covariate decompositions suggest that chronic conditions in childhood may indirectly affect later outcomes through educational attainment: had the two groups had similar levels of educational attainment, the proportion of individuals with a report of a chronic condition in childhood in the lower decile of the relative earnings distribution would have been reduced by about 20 percentage points. Findings may inform policy aimed at mitigating longer run effects of health conditions in childhood and may generate hypotheses to be explored in parametric analyses.

The weaker sex? A tale of means and tails

One of the most commonly held beliefs prevalent in entrepreneurship research is that women-led ventures tend to generate lower earnings than men-led ventures. We contend that this thinking emanates from empirical analyses that obscure the variation in entrepreneurial performance across the earnings distribution. Relying solely on the mean as a measure of central tendency conceals the heterogeneity among so-called underperformers. Using density plots from a nationally representative database, we demonstrate that women-led ventures perform better at some quantiles of the earnings distribution, contrary to the common myth that men-led ventures consistently outperform them. Our study debunks this myth and contributes to entrepreneurship research that adopts a gendered perspective by showing that the reality experienced by women entrepreneurs is not as dismal as it appears when compared to focusing exclusively on the mean. Our study has implications for policymakers, who need to adjust their policy approach by designing targeted policies explicitly incorporating the heterogeneity inherent in entrepreneurship.

Audit adjustments and the discontinuity in earnings distribution around zero

Purpose Previous research in auditing has used the probability of small profits or losses as a measure of audit quality. The purpose of this paper is to investigate the validity of the underlying assumption in prior audit literature that auditing mitigates clients’ inclination towards loss avoidance and to shed light on the debate regarding earnings discontinuity. Design/methodology/approach This paper compares the discontinuity in earnings distribution around zero, both before and after auditing. Findings Using a unique data set that contains both recorded and waived adjustments, the authors find that audit adjustments do not reduce the discontinuity in earnings distribution around zero. Research limitations/implications The results advise caution in using the probability of small profits or losses as a measure of audit quality. The findings suggest the discontinuity in earnings around zero may not be caused by loss avoidance achieved through accounting misreporting, which falls under the purview of auditing. Originality/value This research makes unique contributions beyond those of prior studies. By incorporating waived adjustments, the authors are able to conduct more comprehensive tests and explore richer details of audit adjustments that were not available in previous studies. The proportion of losses in this study's sample aligns with that in prior US research, which enhances the generalisability of the authors’ findings and minimizes the influence of inherent discrepancies in auditors' motivations to curb loss avoidance.

Earnings thresholds in South Africa listed enterprises: Manipulating research and developmental expenditures

Background: Research and developmental (RD) expenditure directly affects profits. Therefore, managers are likely to manipulate RD expenditure to meet earnings thresholds.Aim: This study investigates whether managers manipulate RD expenditure to meet earnings thresholds, while analysing whether the prospect theory explains this behaviour.Setting: The setting is 62 South African firms listed on the Johannesburg Stock Exchange (JSE) studied from 2011 to 2019.Method: We collected 379 annual samples from the SP Capital IQ database and applied the earnings distribution model to estimate the effect of the prospect theory on earnings management.Results: Most South African listed enterprises have earnings above zero, or have avoided reporting earnings in decline before earnings manipulation. Furthermore, the study’s findings reveal that enterprises that have earnings above zero, or have maintained their earnings in the previous period after manipulation, are risk lovers, whereas enterprises with earnings below zero, or lower than those in the previous period, are risk averters.Conclusion: South African listed enterprises do not have a tendency to manipulate RD expenditures to achieve earnings above zero or avoid reporting declining earnings. The prospect theory also fails to explain their behaviour.Contribution: This study is the first to analyse how the prospect theory explains the behaviour of earnings manipulation by using a sample of South African listed enterprises and thereby fills a research gap.

Individual Consequences of Occupational Decline

Abstract We assess the career earnings losses that individual Swedish workers suffered when their occupations’ employment declined. High-quality data allow us to overcome sorting into declining occupations on various attributes, including cognitive and non-cognitive skills. Our estimates show that occupational decline reduced mean cumulative earnings from 1986–2013 by no more than 2%–5%. This loss reflects a combination of reduced earnings conditional on employment, reduced years of employment and increased time spent in unemployment and retraining. While on average workers successfully mitigated their losses, those initially at the bottom of their occupations’ earnings distributions lost up to 8%–11%.

Skills scarcity and export intensity

AbstractWe describe a model of trade with skills‐based product differentiation and non‐proportional trade costs that predicts a positive correlation between firms' export intensity, the price of their exports and the wages they pay to their workers. In equilibrium, firms that employ workers with comparatively scarcer skills export a larger proportion of their output, pay higher wages and charge higher prices. In line with empirical evidence, the model predicts that trade liberalization can cause the distribution of earnings to become more polarized, with patterns that reflect the heterogeneous effects of trade liberalization on firms' export performance.

DISCONTINUITIES IN EARNINGS DISTRIBUTIONS: EVIDENCE FROM SOUTH AFRICA

There is increasing evidence that earnings management amongst firms creates discontinuity in the earnings distribution. We have verified the evidence of discontinuity in earnings distribution for 246 Johannesburg Securities Exchange listed firms from 2003 to 2018. The assets-scaled income was used as earnings measure to present the empirical histograms; the standardized difference test of significance was utilized to establish the existence of discontinuities at zero. The result shows discontinuities in distributions for earnings level and earnings-change. In addition, except for the unscaled earnings, the evidence supposes that the sample design does not explain the discontinuity in the earnings (earnings change) distributions.

Business Valuation Cases in Brief

Business Valuation Cases in Brief

The macroeconomic consequences of subsistence self-employment

We evaluate the aggregate effects of expansions of credit supply in environments where subsistence self-employment is prevalent. We extend a standard macro development model to include unemployment risk, which becomes a key driver of selection into self-employment. The model is consistent with the joint distribution of earnings and occupations, the reaction of wages to labor demand shocks, and the small effects of expansions in the supply of microloans on the earnings of the self-employed. We find that the elasticity of aggregate output to expansions in credit supply is proportional to the elasticity of individual earnings. This proportionality arises due to the muted effects of wages in general equilibrium in the presence of subsistence self-employment, and is not present in models without subsistence self-employment due to a larger wage response, and a larger crowding-out of private savings in response to a higher availability of credit.

Determinant Factors of Dividend Policy in Cooperative Organization

Dividend policy is one of the functions of financial management with regard to the distribution of corporate earnings after tax or the cooperative surplus to the owner. Dividend policy in cooperatives organization is regulated based on regulations and member agreements stipulated in the articles of association and by-laws of the cooperative. The purpose of this study is to analysis the determinant factors of dividend policy in cooperative organization. This study uses research and analysis of descriptive qualitative approach. Data were obtained from 4 cooperatives, where the cooperative determined with consideration of routinely distributing cooperative surplus.The results of the study show that the determinant factors of cooperative dividend policies are found in several additional determinants such as: member participation, cooperative principles, member conditions and regulation, in addition to determinants that have been widely researched and used as guidelines for in general, such as: liquidity, profitability, firm size, capital requirement (leverage), and risk. New findings from the determinants of dividend policy in cooperatives organization such as member participation, cooperative principles, member conditions and regulation need to be studied further with a quantitative research approach, so that the conclusions can be generalized.

New insights into trends and reasons for the gender pay gap in Urban China, 1988-2013

ABSTRACT This study documents long-run trends of the gender pay gap (GPG) in urban China 1988–2013 using the Chinese Household Income Project microdata. We find a fluctuating and enlarging GPG over time. The average ratio of female to male earnings fell from 85.2% to 79.9%. Analysis by earnings percentiles shows that the GPG is larger at the bottom of the earnings distribution than it is at the top. We utilize OLS regressions, Blinder-Oaxaca decomposition, and Juhn-Murphy-Pierce decomposition to make a comprehensive analysis of the contributing factors to the GPG. By 2013, conventional human capital variables explained little of the GPG. Gender differences in location (ownership, occupation, and industry) were important, although the magnitude of the effect of three factors has changed over time. Gender differences in job characteristics (contract type and firm size) are also important in explaining the GPG. The increases in the unexplained gap contributed to the divergence of the gender gap. Analysis by sub-periods shows that there were distinctive patterns behind the changes of the GPG. The main contributors to the diverging trend of the GPG were changes in the wage structure to women and women’s disadvantages in unobserved skills.

Temporary talent: Wage penalties among highly educated temporary workers in Canada

Temporary employment (TE) arrangements have become increasingly common in Canada among both high- and low-skilled workers. In this study, we examine the prevalence and earnings effects of TE across education levels with a specific focus on highly educated workers. We also examine the earnings effects of TE across the earnings distribution. We find that higher levels of schooling are negatively associated with the probability of TE. However, the earnings discounts for temporary work are significant and increase in magnitude for individuals with higher levels of educational attainment. For highly educated workers at the top end of the earnings distribution, the discount associated with being in a temporary job is large enough to substantially reduce, although not entirely negate, the sizeable earnings premiums associated with higher levels of education.

Justice Evaluation of the Income Distribution (JEID): Development and validation of a short scale for the subjective assessment of objective differences in earnings.

Justice evaluations are proposed to provide a link between the objective level of inequality and the consequences at the individual and societal level. Available instruments, however, focus on the subjective perception of inequality and income distributions. In light of findings that subjective perceptions of inequality and income levels can be biased and subject to method effects, we present the newly developed Justice Evaluation of the Income Distribution (JEID) Scale, which captures justice evaluations of the actual earnings distribution. JEID comprises five items that provide respondents with earnings information for five groups at different segments along the distribution of earnings in a given country. We provide a German-language and an English-language version of the scale. The German-language version was developed and validated based on three comprehensive heterogeneous quota samples from Germany; the translated English-language version was validated in one comprehensive heterogeneous quota sample from the UK. Using latent profile analysis and k-means clustering, we identified three typical response patterns, which we labeled "inequality averse," "bottom-inequality averse," and "status quo justification." JEID was found to be related to normative orientations in the sense that egalitarian views were associated with stronger injustice evaluations at the bottom and top ends of the earnings distribution. With a completion time of between 1.50 and 2.75 min, the JEID scale can be applied in any self-report survey in the social sciences to investigate the distribution, precursors, and consequences of individuals' subjective evaluations of objective differences in earnings.

Living wages in Portugal: In search of dignity in a polarised labour market

AbstractLiving wage (LW) is a concept that goes beyond that of national minimum wage (NMW), since it implies income adequacy to the wage earners and to his/her family members. It is coherent with the principle related to wages of the European Pillar of Social Rights (EPSR) namely the right of workers to fair wages, and the duty to ensure adequate minimum wages providing the satisfaction of the worker needs and of his/her family, which originated a proposal of the European Commission for a Directive on adequate minimum wages in the European Union. This article discusses the possibility of implementation of a LW policy in Portugal, a country with low average and median wages, a generous NMW relative to average and median wage, high earnings inequality and a polarised labour market. To be defensible, this policy should reach household income adequacy, be feasible regarding the labour and fiscal costs, and be socially acceptable regarding the change of earnings distribution. The discussion of this policy is made using EU‐SILC data and data from interviews with social partners involved in the national level social dialogue. We quantify and qualify some of the trade‐offs, simulating different values for core policy variables, centred on the worker as a wage earner, as a household member and as a citizen with social rights and fiscal duties, supported on an adequate normative estimation of a consensual Minimum Income Standard (MIS) for the Portuguese households.

Fair value accounting and earnings variability: Evidence from global real estate firms

This study explores the relationship between earnings quality and fair value accounting beyond market-based measures, financial industry-related settings, and US firms. It analyzes the effect of discretionary fair value measurement of investment properties and earnings distribution using a sample of 2,658 observations between 2006 and 2017 from real estate firms in 36 countries. The results indicate that applying the fair value model to investment properties subject to International Financial Reporting Standards (IFRS) increases earnings variability and decreases earnings smoothness. These links are found for a fair value model dummy and incrementally for investment property fair values. Managers do not seem to exploit their discretion in lower-level fair value measurements to smooth out further earnings fluctuations. Among fair value model appliers, earnings variability appears to further increase, and earnings smoothness appears to further decrease, in the case of strong investor protection and real estate sector-specific institutional governance.

The Speed of Earnings Responses to Taxation and the Role of Firm Labor Demand

This paper studies the speed at which workers' pre-tax earnings respond to tax changes along the intensive margin. We do so in the context of Germany, where a large discontinuity — or notch — in the tax schedule induces sharp bunching in the earnings distribution. We analyze earnings responses to two policy reforms that shift this notch outward. In a frictionless world, the workers that made up the excess mass at the old notch should all increase their earnings. While some of these workers indeed adjust their earnings rapidly, over 38% do not, and instead take several years to adjust. We propose that heterogeneity in firm labor demand plays a key role in generating the observed differences in the speed of workers' earnings responses and predict that adjustment will be quickest at growing firms. We test and find support for these demand-side effects in our linked employer-employee data.