Future Earnings Research Articles

Environmental reputational risk, negative media attention and financial performance

AbstractTracing negative media attention, this paper investigates the effect of reputational risk on firm value. Decomposing reputational damage into environmental, social and corporate‐governance dimensions, it reports that environmental reputational risk has the most significant negative effect on price earnings, i.e., firms exposed to environmental risk are likely to be priced at a discount or charged a higher risk premium when discounting future earnings.

The Impact of School Facility Investments on Students and Homeowners: Evidence from Los Angeles

We study school facility investments using administrative records from Los Angeles. Exploiting quasi-random variation in the timing of new facility openings and using a residential assignment instrument, we find positive impacts on test scores, attendance, and house prices. Effects are not driven by changes in class size, peers, teachers, or principals, but some evidence points toward increased facility quality. We evaluate program efficiency using implied future earnings and housing capitalization. For each dollar spent, the program generated $1.62 in household value, with about 24 percent coming directly through test score gains and 76 percent from capitalization of non-test-score amenities. (JEL H75, H76, I21, I26, J31, R31, R53)

The Change in Rating Standards on R&D Expenditures

[Purpose] We examine whether the rating agencies have changed their standards on R&D expenditures over time. Further, to understand the reason why the rating agencies have changed their view on R&D, we examine whether there is a change in the uncertainty generated by R&D expenditures. [Methodology] Using U.S. firms with a credit rating from 1988 to 2016, we investigate the temporal change in the association between credit ratings and R&D expenditures. [Findings] We find that the negative relation between credit ratings and R&D in early periods has become weaker over time. In addition, we find that the positive relation between R&D expenditures and future earnings volatility for sample firms has become weaker over time, suggesting one of a possibility for the observed attenuation in the negative outlook on R&D among rating agencies. [Implications] Our study proposes and empirically substantiates the important role of innovative knowledge, which is created by corporate R&D activities, in determining firms’ credit rating. Also, our findings contribute to the literature on credit rating by providing evidence on the determinant-level change in corporate rating standards.

Correlates of Turnover: Salary and Bonuses

Purpose–This paper investigates how salaries and bonus payments are related to turnover. Design/methodology/approach–The wealth maximization hypothesis posits that turnover is negatively related to the worker’s expected future earnings at the current firm. Thus, salary and bonuses should be related to turnover to the extent they provide information about the worker’s future earnings at the firm. To evaluate this hypothesis, this paper uses data coming from the personnel records of a medium-sized US firm in the financial services industry. Results–The regression results show that pay variables are serially correlated and they signal future promotions in the firm. Thus, both salaries and bonuses provide information about the worker’s future earnings through these two channels. Further, as predicted by the wealth maximization hypothesis, both salaries and bonuses are related to turnover. In particular, the results show that the growth rate of salary and bonus size (as well as earning a bonus in the current year) are negatively related to turnover.Discussion–The findings of this study underscore the importance of pay variables on turnover behavior. While most existing studies focus on salaries, thereby ignoring bonuses, the current analysis shows that bonus payments are an important determinant of turnover. Hence, in addition to providing workers with effort incentives, the retention function of bonuses should be taken into account for designing optimal compensation schemes.

The Role of Circumstances in The Differentiation of Russian Wages

The purpose of this study is to determine the influence of circumstances (opportunities) and efforts on the wages differentiation of Russian citizens. Research objectives: identification of factors of circumstances, quantitative assessment of their contribution to the wages of Russians and their individual income groups. The research is based on the HSE RLMS data for 2004 and 2018 and LITS-III data for 2016. We applied parametric methods of regression analysis, the Morduch-Sicular method of inequality decomposition, as well as the construction of quantile regressions. As a result of the study, we obtained assessments of the contribution of circumstances to wages inequality of the Russian population. We found that income inequality in the Russian labour market was primarily determined by the regional factor, to a lesser extent by the employment sector and the gender of the respondents. The least contribution to inequality was made by the factor of the employment formality. The influence of parents’ education on future earnings of offspring was also negligible – according to the model based on the LITS-III sample. The reduction in the contribution of circumstances to the general wage inequality in Russia in 2004–2018 was mainly due to a decrease in interregional differences in wages, where an active government policy of income redistribution played a significant role. The influence of circumstances on wage inequality was uneven in different quantiles of the distribution scale. In particular, employment in the metropolitan area or in the oil and gas sector has been most beneficial to high-income groups of workers. At the same time, parents’ education had the least and even negative effect on the earnings of the highest-paid people, which can be explained by the peculiarities of the formation of the modern Russian elite. The results of the study are applicable for conducting an effective social policy of the state.

Firm life cycle, expectation errors and future stock returns

I study the return predictability of firm life cycle, originally documented by Dickinson (2011). I show that a hedge portfolio strategy going long on mature firms and short on introduction firms generates a significant hedge portfolio return of 1.29% per month in return-weighted portfolios and 0.72% in value-weighted portfolios. The returns to firm life cycle are related to investors’ and analysts’ expectation errors, are driven by market-wide investor sentiment, and are more pronounced among stocks with low institutional ownership and high idiosyncratic volatility. Quantile regressions show that introduction firms have considerably greater uncertainty and skewness in future earnings growth outcomes than mature firms, such that analysts are better able to justify optimistically biased forecasts for introduction firms compared to mature firms.

Evidence factors from multiple, possibly invalid, instrumental variables

Valid instrumental variables enable treatment effect inference even when selection into treatment is biased by unobserved confounders. When multiple candidate instruments are available, but some of them are possibly invalid, the previously proposed reinforced design enables one or more nearly independent valid analyses that depend on very different assumptions. That is, we can perform evidence factor analysis. However, the validity of the reinforced design depends crucially on the order in which multiple instrumental variable analyses are conducted. Motivated by the orthogonality of balanced factorial designs, we propose a balanced block design to offset the possible violation of the exclusion restriction by balancing the instruments against each other in the design, and demonstrate its utility for constructing approximate evidence factors under multiple analysis strategies free of the order imposition. We also propose a novel stratification method using multiple, nested candidate instruments, in which case the balanced block design is not applicable. We apply our proposed methods to evaluate (a) the effect of education on future earnings using instrumental variables arising from the disruption of education during World War II via the balanced block design, and (b) the causal effect of malaria on stunting among children in Western Kenya using three nested instruments.

Learning loss and learning recovery

In 2020, most countries closed schools. Two years after the pandemic began, the evidence strongly indicates that school closures result in learning loss. A decrease in learning could decrease future employment prospects and lower future earnings. This means that schooling matters. One promising policy option for mitigating learning losses during closures as well for subsequent learning recovery and acceleration is tutoring. While tutoring is effective, the replicability was demonstrated during the COVID-19 school closures. These online experiments were very cost-effective, showing that it is possible to provide quality instruction across the cost spectrum in different contexts.

MARKET CAPITALIZATION OF THE STOCK IN BIRTH - DEATH PROCESSES

In this article the inability to predict the future growth rates and earnings of growth stocks leads to the high volatility of share prices and difficulty in applying the traditional valuation methods. To demonstrate that the high volatility of share prices can nevertheless be used in building a model that leads to a particular cross-sectional size distribution. The model focuses on both transient and steady-state behavior of the market capitalization of the stock, which in turn is modeled as a birth-death process.

Consumer Spending and the Cross-Section of Stock Returns

Using a unique dataset of individual transactions-level data for a universe of US consumer facing stocks, we examine the information content of consumer credit and debit card spending in explaining future stock returns. Our analysis shows that consumer spending data positively predict various measures of a company’s future earnings surprises up to three quarters in the future. This predictive power remains strong in both large- and small-cap universes of consumer discretionary firms in our sample and is robust to the type of transactions data considered (credit card, debit card, or both), although the relationship is stronger in the small-cap universe where informational asymmetries are more pronounced. Based on this empirical observation, we build a simple long–short strategy that takes long–short positions in the top/bottom tercile of stocks ranked on our real-time sales signal. The strategy generates statistically and economically significant returns of 16% per annum net of transaction costs and after controlling for the common sources of systematic factor returns. A simple optimization exercise to form (tangency) mean–variance-efficient portfolios of factors leads to an optimal factor allocation that assigns almost 50% weight to our long–short portfolio. Our results suggest that consumer transaction level data can serve as a more accurate and persistent signal of a firm’s growth potential and future returns.

Les préjudices professionnels des jeunes victimes de dommages corporels. Partie 2 : Les difficultés liées à l’évaluation des pertes de gains professionnels

Though professional damages in respect of young personal injury victims are recognized in principle by the Dintilhac group, and confirmed by the Court of Cassation in terms of full compensation for damages suffered, the assessment of such professional damages remains difficult, and the source of myriad legal disputes. Assessment of lost future earnings requires a specific approach: As regards the benchmark salary, judges base this on the average or median salary in France, taking into account the social and family environment which may represent a loss of opportunity. The jurisprudence recognizes that the permanent incapacity of the victim entitles them to lifetime compensation, mostly in the form of an annuity. However, while the civil judge considers that the payment of an allowance for disabled adults (AAH) or an educational allowance for disabled children (AEEH) does not interfere with the calculation of lost professional earnings, the administrative judge takes the opposite stance.

Les préjudices professionnels des jeunes victimes de dommages corporels. La reconnaissance jurisprudentielle du préjudice professionnel des jeunes victimes. Partie 1

Compensation for professional damages in respect of young victims who remain disabled following an accident or assault remains problematic for personal injury compensation practitioners. However, such professional damages, recognized in principle by the Dintilhac group, were confirmed by the Court of Cassation in terms of full compensation for damages, both for loss of future earnings (PGPF), and professional incidence (IP). Though the burden of proof lies with the victim, experts have a major role to play in assessing these losses by setting out the foreseeable impact of the after-effects on the victim's professional activities, and on his or her professional potential before and after the injury, along with limitations in terms of the jobs the victim is subsequently able to do.

Les préjudices professionnels des jeunes victimes de dommages corporels. Partie 3 : Les difficultés liées à l’évaluation de l’incidence professionnelle

Though professional damages in respect of young personal injury victims are recognized in principle by the Dintilhac group, and confirmed by the Court of Cassation in terms of full compensation for damages suffered, the assessment of such professional damages remains difficult, and the source of myriad legal disputes. The recognition and assessment of professional incidence raises the question of the risk of double compensation: The cumulative award of lifetime compensation for lost future earnings and of compensation for professional incidence not recognized at first by the 2nd chamber of the Court of Cassation is a source of debate in terms of both doctrine and jurisprudence. Though a source of discussion, the cumulative award of compensation for professional incidence and for educational, academic or training damages (PSUF) is more consensual.

Do Mutual Funds Trade on Earnings News? The Information Content of Large Active Trades

Using monthly holdings data, we show that in contrast to findings in existing literature, mutual fund trades in aggregate do not have predictive power for future earnings information. We identify active trades by mutual funds, that is, trades not passively driven by fund flows, and show that only large active trades by mutual funds contain information on future earnings. Moreover, we show evidence that large active trades by mutual funds help incorporate future earnings information into stock prices and significantly improve stock price efficiency. Finally, we show that large active trades by mutual funds prior to earnings announcements deliver superior abnormal returns. Mutual fund managers that actively trade on future earnings information are skilled; the top quintile skilled funds on average outperform those in the bottom quintile by 127 bps in four-factor alpha over subsequent four quarters.

Saving, Interest Rates and Finite Horizons

We study the heterogeneity of interest rate effects on private saving across the age dimension. Taking income and substitution effects as given, we illustrate how in a simple life cycle model, older individuals respond less to interest rate changes than younger ones. This result is driven by the fact that older individuals have a shorter planning horizon, and consequently a lower and less interest sensitive present discounted value of future earnings. However, estimating a dynamic error components model on a global panel of countries spanning the period 1995–2014, we find that there is no evidence for there being a different interest rate effect for countries with higher old age dependency ratios. Our results stand in contrast to recent studies that find effects which are consistent with the theory.

Business Cycle Variation in Short Selling Strategies: Picking During Expansions and Timing During Recessions

AbstractWe present evidence that short sellers alternate between stock picking during expansions and market timing during recessions. First, firm-level short interest is a much stronger negative predictor of the cross-section of stock returns during expansions than it is during recessions. High short interest also only predicts negative future earnings announcement returns during expansions. We attribute these findings to short sellers’ emphasis on collecting firm-specific signals. Second, short sellers appear to make factor bets more so during recessions than during expansions. These bets tend to pay off as we observe a strong negative relation between the betas of highly shorted stocks and future stock market returns, a result that disappears during expansions. Together, these findings are consistent with theories of information acquisition under attention constraints, endogenous information production, as well as theories of time variation in aggregate overconfidence amongst traders.

Estimating the Net Fiscal Cost of a Child Tax Credit Expansion

Recent proposals to expand the Child Tax Credit (CTC) are at the center of current policy discussions in the United States. We study the fiscal cost of three such proposals that would expand refundability of the credit to low-income children, increase the maximum credit amount, and/or eliminate the income phase-out to make the credit universal. For each proposal, we use the Current Population Survey to estimate three components of the net fiscal cost: the direct cost (additional tax refunds or lower tax liability), revenue changes due to taxpayers’ labor supply responses, and long-term changes in tax revenue due to changes in children’s future earnings. We find that direct costs are by far the most important component but that long-term earning changes also play an important role, offsetting 20% of the direct costs of making the credit fully refundable. In contrast, labor supply responses modestly contribute to the fiscal cost of the CTC expansions we model.

영업권 손상인식과 주가의 미래이익정보성

In this study, we investigate whether discretionary recognition of goodwill impairment affects the stock price informativeness of future earnings. Using firm-year observations with a positive beginning goodwill balance from 2011 to 2016, we test whether the decision to recognize impairment loss inconsistent with impairment indication (accelerated impairment) improves the future earnings response coefficient (FERC). We find that the accelerated impairers exhibit greater FERCs, lower value relevance of pre-impairment goodwill, and higher persistence of reported EPS. We suggest that early recognition of impairment from potentially overstated goodwill assists investors in better predicting future earnings by mitigating the measurement error inherent in goodwill book value and smoothing the earnings time series. Our findings fill the literature gap by shedding light on the positive role of accounting discretion exercised under the context of low level fair value applied to goodwill impairment test.

OWNERSHIP ATTRIBUTES AND STOCKS RETURN OF QUOTED CONSUMERS GOODS COMPANIES IN NIGERIA

The significance of ensuring a consistent return on stocks for publicly traded companies cannot be overstated. This is due to the fact that returns inform investors about managerial and market performance and enable them to forecast the company's future earnings. However, global corporate scandals at the turn of the century, as well as the global financial crisis, eroded investor confidence. Seven firms were dropped from the study, which included all 23 consumer goods firms, during the filtration process. Data was extracted from the annual reports of the sampled companies (2010 to 2019) as well as the Nigerian Stock Exchange as of 2020. The ex-post facto approach with agency theory was chosen because the event under consideration has already occurred. Stock returns are the profits or gains made by investors in the stock market. Managers may view the payment of investor returns as a positive indicator of the company's market prospects. The significance of ensuring a consistent return on stocks for publicly traded companies cannot be overstated. The purpose of this research is to look into the effects of three corporate properties on the stock returns of publicly traded consumer goods firms in Nigeria. It was discovered that concentration of ownership, institutional ownership, and ownership all have a significant impact on Nigerian stock returns. It also implies that the SEC should provide an incentive to firms that disclose accounting information in the form of a commendation.

A Study on the Association between Factory Operating Rate and Firm Value*

The operating rate shows how well a factory operates. Reports of media and financial analysts often refer to the operating rate for their analyses, and this study empirically verifies whether firm value increases as the operating rate increases for firms listed on Korean Stock Exchanges from 2015 to 2018. Furthermore, we analyze the mediating effect of fixed costs, research, and development (R&D) costs, and industrial competitiveness and verify whether the change in operating rate provides information about future profits. We find that the operating rate is positively associated with firm value. When fixed costs and R&D costs increase, the positive association is strengthened. Moreover, the positive relation varies depending on the degree of market competition. Lastly, changes in the operating rate provide information for forecasting future earnings. This study provides useful information for investors by verifying the association between the operating rate and firm value considering firm characteristics.