Income Volatility Research Articles

Family Feud: Succession Tournaments and Risk-taking in Family Firms

We study the impact of succession tournaments on risk-taking in family firms. More sons (less daughters) in controlling families are associated with higher income volatility and lower performance – especially, in opaque private firms with pyramidal ownership structure. Contestants exhibit managerial myopia such as higher dividend payouts and less R&D investments. Overall, succession tournaments induce risk-taking and managerial myopia among sons, but positive externalities through marriages (sons-in-law) mitigate these concerns. Using the sudden death of a chairman as an exogenous shock to a succession tournament, we confirm a causal link between increased competition among succession contestants and corporate risk-taking.

The Volatility of Other Comprehensive Income and Audit Fees

SYNOPSIS The volatility in other comprehensive income (OCI) reflects how market-related price movements, such as exchange rate and equity price changes, affect a firm's future profits. Hence, firms with higher volatility of OCI are likely to have higher inherent risk. Using hand-collected data from 2002–2006, we find that the volatility of OCI is positively associated with audit fees and provides significant incremental explanatory power for audit fees over and above the level of OCI and the volatility of net income. We also find that the effect of the volatility of each component of OCI on audit fees is consistent with the prediction of how it might affect a firm's future profits. Our results support recent efforts by the International Accounting Standards Board (IASB) to require firms to present separately OCI components that may affect future earnings from those that may not affect future earnings.

Income volatility: whom you trade with matters

Using a dataset of 165 countries over a period from 1971 to 2010, this paper studies how income volatility abroad affects income volatility at home. Relying on the Markowitz–Tobin definition of portfolio risk to international trade, we disentangle how volatility at home depends on volatility in individual trading partners and on the correlation among trading partners’ business cycles. As it has to be expected when entry new markets yields costs, we find that the correlation among trading partners’ business cycles matters more than the volatility of individual trading partners. These findings can provide useful guidance for export promotion strategies.

Measuring the Effective Tax Burden of Lifetime Personal Income

This paper designs and tests a comprehensive model, solved by statistical simulation, which describes and quantifies the effect of the tax system and lifelong income characteristics on the effective tax burden of a population or its segment. In the present application the model is structured and calibrated to analyse the category of employed persons in the Czech Republic. The Czech tax and levy system is shown to be mildly progressive, with a steep digression for very high incomes. It is also shown how the initial income endowment, lifelong income volatility and the minimum wage level impact the structure of effective tax rates, as well as expected unemployment.

Wealth Inequality and Financial Development: Revisiting the Symmetry Breaking Mechanism

In an overlapping generations model with financial frictions and the fixed investment size requirement, Matsuyama (2004, Econometrica) shows that, in the absence of integrated financial markets, the world economy has a unique steady state, which is symmetric and stable in the sense that inherently identical countries converge to the same income level in the long run, regardless of their initial income level; financial globalization may break this symmetric steady state and lead to cross-country income polarization. He calls this phenomenon symmetry breaking and points out that financial underdevelopment is one of the necessary conditions. We revisit this result by introducing wealth inequality and the minimum investment requirement into his framework. Increasing wealth inequality strictly reduces the possibility of symmetry breaking; if wealth inequality exceeds a threshold value, symmetry breaking does not arise at all, regardless of the level of financial development. Thus, wealth inequality is an equally important factor as financial development in determining the possibility of symmetry breaking. We also address some practical issues in this framework, e.g., the conditions of financial integration, the domestic financial crisis and capital controls, and the world interest rate shocks and income volatility.

Income Gains and Month-to-Month Income Volatility: Household Evidence from the Us Financial Diaries

The US Financial Diaries track the daily finances of low and moderate-income households over a year. The households faced substantial swings in income from month to month. On average, they experienced 2.7 months when income fell more than 25 percent below average, and 2.7 months when income was more than 25 percent above average. The volatility is summarized by an average coefficient of variation of monthly income (within year, averaged across households) of 39 percent. The CV is greatest (55 percent) for households below the poverty line, but the CV remained relatively high (33-35 percent) and steady for households with income from 100 percent of the poverty line up to 300 percent. Thus, in the non-poor sample, greater income did not imply notably greater income stability.

Unsticking the flypaper effect in an uncertain world

We provide a novel explanation for the flypaper effect based on insurance arguments. In our model, the flypaper effect arises due to the differential response of precautionary savings to private income or fiscal transfers shocks in an uncertain world with incomplete markets. The model generates two testable implications: (i) the flypaper effect is a decreasing function of the correlation between fiscal transfers and private income, and (ii) such relationship is stronger the higher is the volatility of fiscal transfers and/or private income. An empirical analysis of Argentinean provinces for the period 1963–2006 finds strong support for the model's implications.

Analysis of poverty status of rural farm families in Akwa Ibom state, Nigeria

This study was conducted to provide empirical evidence of the effect of farming on the poverty status of rural farm families in Uyo, Akwa Ibom State, Nigeria. Data were collected from 80 randomly selected farm families in the study area. Both descriptive and econometric tools were employed to analyze the data.The results show that the study area consists of a mixture of extremely poor, moderately poor and non-poor households.While family sizes and farming activity type, enhanced poverty while age, educational status and off farm income by family heads reduced the incidence of poverty. Based on these findings, the study suggests promoting and improving the educational status of the farmers. Farmers are also encouraged to practice mixed farming and engaging in other economic activities such as petty trading and off-farm activities as these will tend to stabilize income thus reducing income volatility. Some of specific programmes advocated to reduce poverty incidence are provision of educational facilities and equipping households with basic skills. KEYWORDS : Poverty status, rural, farming, family, Akwa Ibom State.

Bank size, competition and risk in the Turkish banking industry

This paper investigates the impact of bank size and competition on earnings volatility and insolvency risk using quarterly data for commercial banks operating in the Turkish banking industry for the period 2002Q1–2012Q2. The main result of the paper indicates that bank size and earnings volatility are negatively related, suggesting that larger banks are less risky. The results also indicate that competition measured by the Boone indicator increases earnings volatility. The results further suggest that higher capitalized banks, banks with a higher share of non-interest income in total income and efficient banks face lower earnings volatility. Finally, insolvency risk measured by Z-score and bank size are positively related, suggesting that larger banks are more stable.

The surprisingly low importance of income uncertainty for precaution

While it is common to use income uncertainty to explain household saving decisions, there is much disagreement about the importance of precautionary saving. This paper suggests that income uncertainty is not an important motive for saving, although households do have other precautionary reasons to save. Using a question from the Survey of Consumer Finances that asks how much households want for precautionary purposes, this paper shows that expressed household preferences, and liquid savings, are much lower than predicted by standard modeling assumptions. Households rarely list unemployment as a reason to save. Perceived income uncertainty does not affect liquid savings or precautionary preferences. Neither does being in an occupation with higher income volatility. Instead, households seem very concerned with expenditure shocks.

Do stylized facts of equity-based volatility indices apply to fixed-income volatility indices? Evidence from the US Treasury market

In this paper, we examine whether widely documented properties of equity-based volatility indices apply to US Treasury bond volatility indices (TBVIXs). We calculate TBVIXs in a model-free way using the market prices of five-, ten- and 30-year Treasury futures options over a sample of more than 20years. The empirical findings of this study reveal that changes in TBVIXs are positively correlated with changes in both Treasury yield rates and US non-fixed income and European equity-based volatility indices. Our analysis also shows that changes in Treasury yield rates Granger cause changes in TBVIXs and that past changes in TBVIXs help explain current changes in equity-based volatility indices (and vice versa). Finally, we find that TBVIXs fall following scheduled macroeconomic news announcements and that the response of TBVIXs to news releases depends to some extent on the magnitude and sign of the surprise in the announcement. This study's findings have implications for volatility risk management using the recently listed futures on the Chicago Board of Options Exchange's ten-year Treasury note volatility index.

Informal learning of temporary agency workers in low-skill jobs

Purpose– The purpose of this paper is to develop and investigate the idea that self-profiling and career control by temporary agency workers (TAWs) in low-skill jobs are positively related to informal learning and that this relationship is mediated by job challenge.Design/methodology/approach– An online survey study was conducted among 722 TAWs in low-skill jobs in the Netherlands. Bootstrap mediation analyses were used to test the hypotheses.Findings– Self-profiling and career control are positively related to informal learning of TAWs and these relationships are mediated by job challenge.Research limitations/implications– This is the first study to develop and empirically test the proposition that self-profiling and career control are important factors for enhancing employees’ learning experiences in low-skill jobs.Practical implications– Hiring companies and temporary work agencies could stimulate and train TAWs’ self-profiling and career control competencies to enhance their job challenge and informal learning. Organizations should consider assigning challenging tasks to TAWs, which may be a good alternative for expensive formal training programs.Social implications– Many TAWs in low-skill jobs do not possess the skills and capacities to obtain a better or more secure job. In general, temporary workers face a higher risk of unemployment and greater income volatility (Segal and Sullivan, 1997). Gaining knowledge about how to develop this group is important for society as a whole.Originality/value– Research on the determinants of informal learning mainly concerned higher-educated employees and managers with long-term contracts (e.g. Donget al., 2014), whereas very little is known about factors that stimulate informal learning among TAWs in general, and among TAWs in low-skill jobs in particular.

Fiscal sustainability and the State Oil Fund in Azerbaijan

Azerbaijan, like many resource-rich countries, decided to set up a sovereign wealth fund in order to avoid income volatility, to achieve intergenerational equity and to transform resource wealth into more productive assets. Azerbaijan established the State Oil Fund of the Azerbaijan Republic (SOFAZ) in late 1999 to accumulate income from hydrocarbon exports. SOFAZ has gradually become the leading part of the country's public finance system. Azerbaijan was the first country to fulfill all requirements of the Extractive Industries Transparency Initiative (EITI), an international agreement to implement global standards of transparency in the resource extracting sectors. However, SOFAZ's contribution to an effective resource revenue management and long-run economic development is still questionable: transparency applies only to the income side of Azerbaijan's oil fund while the expenditure side remains opaque. Unlimited and unconditional transfers from SOFAZ to the state budget have threatened fiscal sustainability and the overall macroeconomic equilibrium.

Understanding Triggers of Food Insecurity

ObjectiveThis session explores why households move in and out of food insecurity.Design, Setting and ParticipantsThe two-phased, longitudinal mixed-methods study used a socio-ecological theoretical framework. First, employing a cross sectional, observational design, we administered in-person surveys to 320 adults in very low food secure households with children in 8 counties in North Carolina with the highest food insecurity rates (>30%). Over 1 year later, we repeated select questions, including the Household Food Security Survey Module and conducted in-depth interviews with a cohort (n=28) of participants.Outcome Measures and AnalysisWe produced separate cross-tabular estimates comparing baseline and follow up data for household food security and socioeconomic characteristics and analyzed interview data for events that triggered food shortages.ResultsMost respondents reported having different life circumstance at follow-up compared to baseline that affected their household’s food security. Almost half of participants’ food security improved. Categories of circumstances that affected food security included: family composition (e.g. change in marital status or household size); health (e.g. prolong illness or recovery); unexpected living expenses (e.g. car repair or purchase); and seasonal expenses (e.g. energy cost, school fees). Participation in SNAP, WIC, school food and financial assistance programs remained consistent between times baseline and follow-up.Conclusions and ImplicationsHouseholds can often manage until an unexpected expense upsets planned budgets and strategies. Reducing income volatility, helping to limit expenses (e.g., providing affordable health care, improving affordability of housing, strengthening resource management skills), and offering emergency financial assistance as a needed buffer may enable households to improve and maintain their food security.FundingUniversity of Kentucky Center for Poverty Research. ObjectiveThis session explores why households move in and out of food insecurity. This session explores why households move in and out of food insecurity. Design, Setting and ParticipantsThe two-phased, longitudinal mixed-methods study used a socio-ecological theoretical framework. First, employing a cross sectional, observational design, we administered in-person surveys to 320 adults in very low food secure households with children in 8 counties in North Carolina with the highest food insecurity rates (>30%). Over 1 year later, we repeated select questions, including the Household Food Security Survey Module and conducted in-depth interviews with a cohort (n=28) of participants. The two-phased, longitudinal mixed-methods study used a socio-ecological theoretical framework. First, employing a cross sectional, observational design, we administered in-person surveys to 320 adults in very low food secure households with children in 8 counties in North Carolina with the highest food insecurity rates (>30%). Over 1 year later, we repeated select questions, including the Household Food Security Survey Module and conducted in-depth interviews with a cohort (n=28) of participants. Outcome Measures and AnalysisWe produced separate cross-tabular estimates comparing baseline and follow up data for household food security and socioeconomic characteristics and analyzed interview data for events that triggered food shortages. We produced separate cross-tabular estimates comparing baseline and follow up data for household food security and socioeconomic characteristics and analyzed interview data for events that triggered food shortages. ResultsMost respondents reported having different life circumstance at follow-up compared to baseline that affected their household’s food security. Almost half of participants’ food security improved. Categories of circumstances that affected food security included: family composition (e.g. change in marital status or household size); health (e.g. prolong illness or recovery); unexpected living expenses (e.g. car repair or purchase); and seasonal expenses (e.g. energy cost, school fees). Participation in SNAP, WIC, school food and financial assistance programs remained consistent between times baseline and follow-up. Most respondents reported having different life circumstance at follow-up compared to baseline that affected their household’s food security. Almost half of participants’ food security improved. Categories of circumstances that affected food security included: family composition (e.g. change in marital status or household size); health (e.g. prolong illness or recovery); unexpected living expenses (e.g. car repair or purchase); and seasonal expenses (e.g. energy cost, school fees). Participation in SNAP, WIC, school food and financial assistance programs remained consistent between times baseline and follow-up. Conclusions and ImplicationsHouseholds can often manage until an unexpected expense upsets planned budgets and strategies. Reducing income volatility, helping to limit expenses (e.g., providing affordable health care, improving affordability of housing, strengthening resource management skills), and offering emergency financial assistance as a needed buffer may enable households to improve and maintain their food security. Households can often manage until an unexpected expense upsets planned budgets and strategies. Reducing income volatility, helping to limit expenses (e.g., providing affordable health care, improving affordability of housing, strengthening resource management skills), and offering emergency financial assistance as a needed buffer may enable households to improve and maintain their food security.

Kindred Distributions: An Application to Wealth and Income Densities

We describe a simple method to obtain kindred stationary densities of random Markov processes with respect to an Ito transformation function. As applied to income and wealth densities, they are akin to one another because they share the income growth and income volatility shape parameters. The procedure first assumes a linear infinitesimal drift and a quadratic infinitesimal variance, which together with the stationary Kolmogorov forward equation gives rise to a power law income distribution. To find a kindred distribution we assume that the rate of change of wealth is a function of savings from income and the returns from accumulated wealth. Applying the Ito transformation, we then obtain an explicit wealth-income density, which turns out to be another power law density with an augmented exponential term. It shares certain shape parameters with the income density. Another objective of the paper is to learn how volatility affects the specific wealth-income prediction in Piketty-Zucman (2014).

Trade Creation and Diversion Effects and Exchange Rate Volatility in the Global Meat Trade

A modified gravity model is specified and applied to meat trade markets to identify factors affecting bovine and swine meat trade flows. The model is used to evaluate the effects of bilateral and regional free trade agreements. This study reveals that gravity models can be effectively parameterized and used in single commodity trade studies. Using data from 1986 to 2009, the results show that income, population, production capacity, distance, and exchange rate volatility are major factors affecting meat trade.

Dividend Policy, Ownership Structure and Corporate Governance: An Empirical Analysis of Indian Firms

In this article, we investigate the possible association between the firm's ownership structure and dividend policy and whether the corporate governance (CG) practices adopted by the firm have any impact on dividend policy. In India the presence of family-run firms, with concentrated ownership, is a reality and we try to understand whether such firms have any significantly different approach to dividend policy compared to non-family-run companies.The use of debt by firms in their capital structure acts as an additional monitoring mechanism and we propose to analyse whether this has any impact on dividend policy.We explore the determinants of dividend policy of Indian firms. Thus, firm characteristics which seem to have an impact on dividend policy, like profitability, liquidity, growth, income volatility, size and age are investigated. We use a panel of 51 top Indian listed firms, in terms of market capitalisation (BSE 100 and NIFTY 100), over the 5-year period from 2007–2008 to 2011–2012 for our analysis.We conclude that the CG variables, namely, board size, independent directors and the proportion of non-executive directors on the board have significant impact on the dividend policy of the firm.The proportion of cash and cash equivalent to total asset, used as a measure of firm liquidity, also has an influence on the dividend policy. Growth opportunities have a positive influence on the dividend policy of firms.

Tax Progressivity and Its Effect on Economic Growth

This paper investigates whether there is a relationship between progressivity of personal income taxation and output growth. Additionally a relation between progressivity of personal income taxation and volatility of output growth is examined. There is a gap in the existing literature examining whether personal income progressivity imposed on different levels of income effect economic growth similarly. This research contribute to the existing literature by examining the link between economic growth and progressivity imposed on low, medium and high levels of income earners separately. The research is carried out using dataset ranging from 2000 to 2013 and covering 34 OECD countries. The results of the analysis suggest that progressivity occurring at lower and higher levels of income has a negative effect on output growth, while progressivity at middle levels of income has a positive effect. Moreover, progressivity of personal income taxation has a positive effect on volatility of output growth, irrespective of whether progressivity occurs at lower, middle or higher level of income. Performed robustness tests confirms these findings.

Earnings Volatility Trends and the Great Moderation: A Multifactor Residual Approach

To explore trends in idiosyncratic income volatility, this paper employs a multifactor residual model to extract macroeconomic factors from individual changes in wages and total family income. The data used in this analysis is a subset of the persistently employed from the Panel Survey of Income Dynamics (PSID). Using this subset expands the income volatility literature by bridging an existing gap between studies using the PSID and others using a continuous work history sample. Improved aggregate economic conditions can explain much of the reduction in unconditional income volatility that took place during the Great Moderation, lasting from the mid-1980s into the 2000s. However, macro factors appear to be making larger contributions to individual and household income volatility following the recent rise in GDP volatility. In contrast, idiosyncratic volatility of income, that which remains after accounting for macroeconomic factors, has generally remained consistent. The stability of idiosyncratic income volatility suggests employment changes in the recent crisis were cyclical rather than structural.

CLIMATE AND INSTITUTIONAL CHANGE VERSUS EXPECTED ECONOMIC PERFORMANCE OF AGRICULTURAL HOLDINGS

Climate change, liberalisation of international trade in agricultural products and changes in the system of farms’ support result in the increasing importance of the risk problem in European and Polish agriculture. It can be expected that a change in market and production conditions will result in significant increase in income volatility. The scale of change will depend on the financial support directed to agricultural sector and farmers’ reactions. The study reveals that in the case of Poland the most likely scenario results in rather moderate deterioration in farms’ financial results measured under risk. Extreme deterioration can be observed in the liberal scenario under assumption of financial support elimination.