Geographic Earnings Research Articles

Geographic earnings inequality by race, 1960–2016

AbstractGeographic inequality and racial disharmony are considered major factors in America's political divergence. This paper calculates geographic earnings inequality from 1960 to 2016 separately by race. From 2000 to 2016, White geographic inequality was significantly higher, and Hispanic geographic inequality was significantly lower, than Black and Asian geographic inequality. White geographic inequality rose from 1980 to 2008. Black and Hispanic geographic inequality fell from 1960 to 1980. Rural controls explain substantial shares of White geographic inequality in all years. Region and rural controls account for large shares of Black geographic inequality, especially from 1960 to 1990. Post‐1990, geographic inequality changes are largely explained by changes in overall earnings inequality, but 1960–1990 changes are not. Between‐race differences in geographic inequality translate into high‐income metropolitan statistical areas having had, since 1980, significantly smaller shares of Whites among their low‐income residents.

The Reexamination of Geographic Earnings Conservatism

U.S. Multinational corporations are operated in many different countries. Their foreign and domestic earnings are separately reported in the annual report. This paper examined the difference between domestic and foreign earnings in terms of conservatism using a variety of model specifications for conservatism. I found that the degrees of conservatism of domestic earnings are much higher than foreign earnings in all the model specifications for conservatism, which is in line with prior literature (Hwang and Kim 2022). More importantly, I found that the higher financial leverage, the declining asset growth and the higher information asymmetry significantly increase the level of conservatism of domestic earnings rather than foreign earnings.

Parent–subsidiary geographic dispersion and earnings management

ABSTRACT This study investigates the relationship between parent–subsidiary geographic dispersion and earnings management in China. We find that the parent–subsidiary geographic dispersion is positively associated with earnings management. This positive association is attributable to legal and cultural differences as well as firms with more agency conflict as proxied by: state-owned firms and non-cross-listed firms. Our findings are robust across various sensitivity analyses.

The effect of tax-motivated income shifting on information asymmetry

We examine whether tax-motivated income shifting by U.S. multinational corporations affects information asymmetry. Using a new firm-year measure of income shifting and a two-stage least squares approach, we find income shifting is positively associated with four measures of information asymmetry. Cross-sectional tests reveal that this effect is more pronounced for firms with large differences between foreign and domestic earnings growth. Using SFAS 131 to improve identification and establish evidence consistent with a causal relation between income shifting and information asymmetry, we demonstrate that the adverse impact of income shifting on information asymmetry is concentrated in firms that discontinue geographic earnings disclosures. Overall, our study provides evidence that significant consequences of information asymmetry are associated with tax-motivated income shifting.

Tax avoidance and geographic earnings disclosure

This study tests the relation between corporate tax avoidance and disclosure of geographic earnings for U.S. multinational companies. We find that after the adoption of Statement of Financial Accounting Standards No. 131 in 1998, firms opting to discontinue disclosure of geographic earnings in their financial reports have lower worldwide effective tax rates. These results are consistent with managers perceiving that non-disclosure of geographic earnings helps mask tax avoidance behavior. However, the relation between tax avoidance and non-disclosure reduces after implementation of Schedule M-3 in the annual corporate tax filing beginning in 2004. Schedule M-3 requires a detailed reconciliation of book income to tax income and aims to make firms' tax avoidance activities associated with shifting profits to lower-tax foreign jurisdictions more apparent to the IRS. This study contributes to our understanding of the relation between financial reporting behavior and tax reporting behavior.

Tax Avoidance and Geographic Earnings Disclosure

This study tests the relation between corporate tax avoidance and disclosure of geographic earnings for U.S. multinational companies. We find that after the adoption of Statement of Financial Accounting Standards No. 131 in 1998, firms opting to discontinue disclosure of geographic earnings in their financial reports have lower worldwide effective tax rates. These results are consistent with managers perceiving that non-disclosure of geographic earnings helps mask tax avoidance behavior. However, the relation between tax avoidance and non-disclosure reduces after implementation of Schedule M-3 in the annual corporate tax filing beginning in 2004. Schedule M-3 requires a detailed reconciliation of book income to tax income and aims to make firms’ tax avoidance activities associated with shifting profits to lower-tax foreign jurisdictions more apparent to the IRS. This study contributes to our understanding of the relation between financial reporting behavior and tax reporting behavior.

The effect of SFAS 131 on the stock market’s ability to predict industry-wide and firm-specific components of future earnings

This study examines the impact of SFAS 131 on the extent to which stock prices incorporate industry-wide and firm-specific components of future earnings. By decomposing earnings into industry-wide and firm-specific components, this paper finds that the firms that aggregated segments under the old rule experience significant acceleration in the incorporation of future earnings into current stock prices upon adoption of SFAS 131. However, the acceleration of future earnings is mostly driven by the improved incorporation of industry-wide components of future earnings, which indicates the market’s ability to predict firm-specific components is not significantly changed. Supplemental analysis suggests that the reduced geographic earnings information is one possible reason for lack of improvement in incorporating firm-specific earnings into price.

A Literature Review on the Value Relevance of Geographic Segment Earnings

A Literature Review on the Value Relevance of Geographic Segment Earnings

Geographic earnings disclosure and trading volume

Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related Information, most US multinational firms no longer disclose geographic earnings in their annual reports. Given the recent growth in foreign operations of US firms and the varying operating environments around the world, information (or lack thereof) related to geographical performance can affect investors’ information set. Using empirical tests that closely follow the [Kim, O., Verrecchia, R., 1997. Pre-announcement and event-period private information. Journal of Accounting and Economics 24, 395–419] model, we find results consistent with their predictions. Specifically, using a sample of firms with substantial foreign operations, we find evidence of a decrease in event period private information following adoption of SFAS 131 for firms that no longer disclose geographic earnings. These results suggest that decreased public information (i.e., non-disclosure of geographic earnings) reduces the ability of investors to utilize or generate private information in conjunction with the public announcement of quarterly earnings, which dampens trading. We also find evidence of a decrease in pre-announcement private information following adoption of SFAS 131. This is consistent with an overall improvement in public disclosures that has the effect of reducing differences in the precision of private information across investors in the period prior to the earnings announcement. However, such an effect is observed for both firms which no longer disclose geographic earnings and for firms that continue to disclose geographic earnings.

The Information Content of Quarterly Foreign Earnings of U.S. Multinational Companies under SFAS No. 131

ABSTRACT: This paper examines the association between (1) cumulative abnormal stock returns around earnings announcements and (2) geographic sales and geographic earnings data from quarterly segment disclosures by U.S. multinational companies under SFAS No. 131. Only those firms that define their operating segments by geographic area or by a combination of products and services and geographic area are required to disclose this information. The sum of the quarterly earnings (sales) from the foreign geographic segments yields our measure of quarterly foreign earnings (sales). We show that change in quarterly foreign earnings is positively associated with the stock market reaction. Further, the stock market reaction to change in quarterly foreign earnings is different from the stock market reaction to change in quarterly domestic earnings. Quarterly changes in foreign and domestic sales have little additional information content in the presence of quarterly changes in foreign and domestic earnings.

Managerial Empire Building and Firm Disclosure

ABSTRACTThis study tests the agency cost hypothesis in the context of geographic earnings disclosures. The agency cost hypothesis predicts that managers, when not monitored by shareholders, make self‐maximizing decisions that may not necessarily be in the best interest of shareholders. These decisions include aggressively growing the firm, which reduces profitability and destroys firm value. Geographic earnings disclosures provide an interesting context to examine this issue. Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), most U.S. multinational firms are no longer required to disclose earnings by geographic area (e.g., net income in Mexico or net income in East Asia). Such nondisclosure potentially reduces the ability of shareholders to monitor managers' decisions related to foreign operations. Using a sample of U.S. multinationals with substantial foreign operations, we find that nondisclosing firms, relative to firms that continue to disclose geographic earnings, experience greater expansion of foreign sales, produce lower foreign profit margins, and have lower firm value in the post–SFAS 131 period. Our conclusions are strengthened by the fact that these differences do not exist in the pre–SFAS 131 period and do not relate to domestic operations. We find differences in the predicted direction only for foreign operations and only after adoption of SFAS 131. Our results are robust to the inclusion of an extensive set of control variables related to alternative corporate governance mechanisms, operating performance, and the firm's information environment. Overall, the results are consistent with the agency cost hypothesis and the important role of financial disclosures in monitoring managers.

Managerial Empire Building and Firm Disclosure

This study tests the agency cost hypothesis in the context of geographic earnings disclosures. The agency cost hypothesis predicts that managers, when not monitored by shareholders, will make self-maximizing decisions which may not necessarily be in the best interest of shareholders. These decisions include aggressively growing the firm, which reduces profitability and destroys firm value. Geographic earnings disclosures provide an interesting context to examine this issue. Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), most U.S. multinational firms are no longer required to disclose earnings by geographic area (e.g., net income in Mexico or net income in East Asia). Such non-disclosure potentially reduces the ability of shareholders to monitor managers' decisions related to foreign operations. Using a sample of U.S. multinationals with substantial foreign operations, we find that non-disclosing firms, relative to firms that continue to disclose geographic earnings, experience greater expansion of foreign sales, produce lower foreign profit margins, and have lower firm value in the post-SFAS 131 period. Our conclusions are strengthened by the fact that these differences do not exist in the pre-SFAS 131 period and do not relate to domestic operations. We find differences in the predicted direction only for foreign operations and only after adoption of SFAS 131. Our results are robust to the inclusion of an extensive set of control variables related to alternative corporate governance mechanisms, operating performance, and the firm's information environment. Overall, the results are consistent with the agency cost hypothesis and the important role of financial disclosures in monitoring managers.

Geographic Earnings Disclosure and Trading Volume

Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related Information, most U.S. multinational firms no longer disclose geographic earnings in their annual reports. Given the recent growth in foreign operations of U.S. firms and the varying operating environments around the world, information (or lack thereof) related to geographical performance can affect investors information set. Using empirical tests that closely follow the Kim and Verrecchia (1997) model, we find results consistent with their predictions. Specifically, using a sample of firms with substantial foreign operations, we find evidence of a decrease in event-period private information following adoption of SFAS 131 for firms that no longer disclose geographic earnings. These results suggest that decreased public information (i.e., non-disclosure of geographic earnings) reduces the ability of investors to utilize or generate private information in conjunction with the public announcement of quarterly earnings, which dampens trading. We also find evidence of a decrease in pre-announcement private information following adoption of SFAS 131. This is consistent with an overall improvement in public disclosures that has the effect of reducing differences in the precision of private information across investors in the period prior to the earnings announcement. However, such an effect is observed for both firms which no longer disclose geographic earnings and for firms that continue to disclose geographic earnings.

The Impact of Nondisclosure of Geographic Segment Earnings on Earnings Predictability

We address whether nondisclosure of geographic segment earnings after implementation of Statement of Financial Accounting Standards No. 131 (SFAS 131) has an impact on the earnings predictability of multinational companies. An understanding of how nondisclosure of accounting information affects the predictability of a firm's earnings will be of importance to financial statement users, managers, auditors, and standard setters. The quality of geographic disclosures is especially important as foreign operations represent a growing portion of many U.S. multinational companies and these operations can vary considerably on risk and return characteristics. Prior research has focused almost exclusively on issues involving line of business segment reporting after implementation of SFAS 131. However, SFAS 131 has noticeably affected geographic earnings disclosures. Firms that define their operating segments on any basis other than geographic area are no longer required to disclose geographic earnings. We find that nondisclosure of geographic earnings has no effect on analysts' forecast accuracy or dispersion. We conclude that the Financial Accounting Standards Board's decision to no longer require disclosure of geographic earnings for secondary segments has not hampered users' ability to predict earnings of U.S. multinational companies.

The Role of Human and Social Capital in the Geographic Mobility and Annual Earnings among Mexican Immigrants

The Mexican-origin population continues to be concentrated predominantly in the Southwest, a pattern found among both native- and foreign-born persons. This analysis draws from the human capital and social capital perspectives to examine the impact of human capital and social capital on the outmigration of Mexican immigrants from the Southwest to other regions of the country between 1985 and 1990, the period associated with the initial migration of Mexicans to new-destination areas. In addition, insights from these two perspectives are also used to assess their influence on the earnings of persons who left the Southwest during this period. The analysis is based on data from the 1990 Public Use Microdata Sample (PUMS) and includes 46, 120 foreign-born persons of Mexican-origin who lived in the Southwest in 1985. The results suggest that both human capital and social capital have an impact on the outmigration of Mexican immigrants, with the former varying by length of residence in the United States. Further...

Geographic Segment Disclosure and the Predictive Ability of the Earnings Data

Standards of segment reporting disclosure of the enterprise's foreign operations by geographic area [FASB 1976, Statement No. 14]. This information is believed to be useful in predicting the future prospects of the enterprise as a whole. This paper examines the predictive value of geographic earnings vis-a-vis consolidated earnings figures. Time-series methodology is used for this analysis. Forecasting models were developed for both segmental and consolidated income series. To test the predictive ability of each set of data, earnings forecasts were made. Both the enterprise's segmental and consolidated models were used for these predictions. The result indicate that, although consolidated income series provide a reasonably adequate forecast of income, geographically segmented earnings improve the accuracy of predictions. Further, the findings suggest that the predictive ability of foreign earning is slightly improved (in eleven out of fifteen cases) with more data disaggregation.

Geographic Earnings Differentials and Foreign Trade

On the basis of this information we may make the flat statement: If the retirement distribution can be assumed to resemble the curve shown in Chart I, and the trend of installations over a past period of double the average service life of the assets can be roughly represented by a constant rate of growth, then, whatever that growth rate and whatever the life average, the gross survivor value computed by the crude method does not deviate by more than 6 per cent from what would be obtained by the correct method.5 In the case of a structurally similar retirement distribution with less relative dispersion the divergence for any given r n, hence also the maximum divergence, would be smaller.6 As far as they go, these findings indicate that the simple cumulation method does yield an acceptably close approximation to the correct result. To secure a fully generalized answer, covering most cases likely to occur in practice, it would be necessary (and probably sufficient) to add a similar analysis for the other f (x) and g (t) types listed above. If survival rates based on a skew retirement distribution curve were applied to the g (t)function underlying the preceding analysis, the divergence between the two S would have different values and different maxima, depending on the degree of skewness and dispersion of f (x). But a maximum divergence for some specifiable rnproduct may again be expected to exist for any assumed f (x). If the assumed g (t)-pattern is anything other than the simple exponential growth function we have used, the percentage deviation between the two gross stock values must be expected to depend also on the specific contour of the installation flow during the past period indicated by the range s, hence on the length of that range and thus, in general, on the life average n as well. 'The margin between 6 per cent and the 5.26 per cent we have derived is certainly sufficient to allow for any possible difference of our result from what would be obtained if annual rather than continuous functions were used. 8In our analysis we have purposely experimented with a retirement distribution curve having a fairly high coefficient of variation, which of course tends to increase the relative disparity between Si and S2. If retirements are completely concentrated at the average service life, the gross survivor values obtained by the two methods are always equal. In this as in any similar analysis, minor erratic oscillations of actual installations around a generally realistic g (t)-trend, or of actual retirements around a generally realistic f (x) -curve, will hardly affect the reliability of the results, except perhaps in the case of very short average service lHves.