Initial Earnings Research Articles

Twenty Years of the NCREIF Property Index

This study overviews the performance of the NCREIF Property Index, by property type, over the twenty‐year period ended in 1998. More exactly, performance is analyzed from the perspective of the fundamental sources of return: initial earnings yield, dividend payout ratios, earnings growth, shifts in capitalization rates and other (less significant) effects. (While this approach is here applied to private real estate equities, nothing precludes its application to a variety of other investment classes.) Our results indicate the fundamental sources that have contributed to the Index’s considerable cross‐sectional variation as well as its time‐series variation. Therefore, this study should be viewed as a useful historical account for those interested in understanding the ex post return‐generating process of the Index and its property‐type components as well as those who wish to model the ex ante return‐generating process for a variety of applications in both the equity and debt markets—regardless of whether the securities are publicly or privately traded.

Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self‐Employment

Possible explanations for earnings differentials in self-employment and paid employment are investigated. The empirical results suggest that the nonpecuniary benefits of self-employment are substantial: Most entrepreneurs enter and persist in business despite the fact that they have both lower initial earnings and lower earnings growth than in paid employment, implying a median earnings differential of 35 percent for individuals in business for 10 years. The differential cannot be explained by the selection of low-ability employees into self-employment and is similar for three alternative measures of self-employment earnings and across industries. Furthermore, the estimated earnings differentials may understate the differences in compensation across sectors since fringe benefits are not included in the measure of employee compensation.

Pricing of Foreign GAAP Earnings in U.S. Capital Market Prior to the SEC Required Reconciliation Disclosure

The Securities and Exchange Commission (SEC) requires foreign registrants to include in their annual reports on Form 20-F reconciliation to U.S. GAAP of net income, earnings per share, and shareholders' equity, if materially different. Previous research indicates that foreign firms usually file their reports with the SEC near or at the deadline, that is six months after the fiscal year-end and about three months after the earnings announcement. The purpose of this study is to examine U.S. investors' ability to interpret foreign GAAP earnings before the SEC regulated disclosure becomes publicly available. Presented empirical evidence indicates that market participants are able to infer U.S. GAAP earnings from the foreign GAAP earnings at the time of initial earnings announcements.

Twenty Years of the NCREIF Property Index

This study overviews the performance of the NCREIF Property Index, by property type, over its initial twenty-year period. As a precursor to more exact analytical methods, the study displays the path of earnings, cash flow and property values over this twenty-year period. More exactly, the performance is analyzed from the perspective of the sources of return: initial earnings yield, dividend pay-out ratios, earnings growth, shifts in capitalization rates and other (less significant) effects. (While this approach has been applied to private real estate equities, nothing precludes its application to variety of other investment classes.) Our results indicate the fundamental sources that have contributed to the Index's considerable cross-sectional variation as well as its time-series variation. As such, this study should be viewed as a useful historical account for those interested in understanding the ex post return-generating process of the Index and its property-type components as well as those who wish to model the ex ante return-generating process for a variety of applications in both the equity and debt markets, regardless of whether the securities are publicly or privately traded.

Evidence that Prices Do Not Fully Reflect the Implications of Current Earnings for Future Earnings: An Experimental Markets Approach*

Abstract. Analysts have been found to underweight the innovation in the most recent quarterly earnings when forecasting next‐quarter earnings, and these expectations have been posited as an explanation for post‐earnings‐announcement drift. This study uses an experimental asset market to examine whether similar errors in forecasting quarterly earnings are made by student‐subjects. We examine two aspects of their behavior: (1) do subjects underestimate the autocorrelation in quarterly earnings when forming earnings expectations? and (2) are asset prices consistent with a subject's underestimation of the autocorrelation in quarterly earnings?We observe subject errors in forecasts that underweight extreme innovations in the most recent quarterly earnings by approximately 40 percent. The prices in the experimental markets also fail to reflect fully the most recent innovation in quarterly earnings. We are able to predict the sign of the incorrect pricing, from the mean initial earnings predictions of the subjects, in 74 percent of the 135 markets. These forecast errors observed in this study are consistent with forecast errors observed for analysts, and this consistency suggests that errors in analysts' forecasts may be at least partially attributable to the use of judgmental heuristics.

The Immigrant Assimilation Puzzle in Late Nineteenth-Centuty America

Recent studies suggest that the earnings of pre-1890 immigrants grew slowly compared with those of natives and imply that these immigrants did not assimilate well into the American labor market. Using data for Michigan and California this article estimates new specifications for immigrant and native-born earnings, and finds that immigrants who arrived as children had similar earnings profiles to the native-born. Immigrants who arrived as adults suffered an initial earnings disadvantage but their earnings grew faster than those of the native-born. These results are consistent with the traditional view that pre-1890 immigrants assimilated well.

Earnings Convergence: Does It Matter Where Immigrants Come from or Why?

Recent immigrants to the US are starting their economic lives at substantially lower earnings than previous cohorts of immigrants. This decline--attributed to high family admissions and changes in the country-of-origin composition of US immigrants--has fostered concerns about the quality of recent immigrants and motivated changes in US immigration law as well as calls for further change. The importance of these concerns depends upon whether immigrants starting with low earnings remain at a disadvantage throughout their working lives. This paper summarizes the research concerning the relationship between immigrant entry earnings and earnings growth and the effect on immigrant earnings growth of kinship admission and country of origin. For cohorts from the same country of origin education group and age group the authors find strong evidence of a systematic inverse relationship between initial earnings and subsequent earnings growth. With regard to the effect of greater admissions on the basis kinship the authors find that declines in admissions on the basis of occupational skills and corresponding increases in admissions on the basis of family are associated with both a decrease in initial earnings and an increase in earnings growth. Finally they find that the importance of country of origin as a determinant of immigrant earnings diminishes with time in the US; the earnings of demographically comparable immigrants regardless of origin converge with time in the US. (authors)

The Valuation Consequence of Accounting Changes: A Multi-Year Examination

We examine the valuation impact of changes in the accounting procedures and estimates underlying reported financial data in the year of the change as well as in the postchange years. Since most accounting changes have undisclosed effect on financial variables in subsequent years in addition to the earnings impact disclosed in the year of the change, an accounting change might be motivated by its long-term valuation effect, even if investors are cognizant of the initial earnings impact and fully account for it in the year of the change. This conjecture is empirically examined for the first time in this study. Our tests are based on a cross-sectional examination of the valuation impact of the earnings effect of accounting changes in the year of the change and a longitudinal examination of the behavior of returns in the postchange years. We also provide descriptive evidence indicating that earnings management is a managerial motive for changing accounting techniques. Cross-sectionally, for income-increasing accounting changes, our results show that investors' valuations seem to reflect a concern for the reduced quality of earnings, as reflected by smaller earnings response coefficients and R2s. However, the decline is not attributable specifically to the earnings effect of the accounting change. Similarly, the earnings effect of income-decreasing changes does not have valuation impact in the year of the accounting change. Although investors appear to largely ignore the accounting changes in the year they are made, our longitudinal test does show that firms undertaking accounting changes experience different long-term returns relative to other firms in the postchange period. However, income-increasing accounting changes are associated with negative valuation changes in the postchange period, rather than the positive impact expected from the conjecture stated above. Over the five years following the year of the accounting change, abnormal returns of income-decreasing firms exceed those of income-increasing firms substantially, with the latter firms experiencing large negative returns over the period. We demonstrate a trading rule that, ex post, exploits the information contained in the accounting changes to yield large abnormal stock returns. The results suggest that income-increasing accounting changes are perhaps the first visible sign indicating other hidden, fundamental problems that get revealed in subsequent years.

Is There a Double-Negative Effect on the Earnings of Immigrant Women?

This paper examines whether there is a double-negative' effect on the earnings of immigrant women arising from a possible combined negative impact of gender and birthplace on earnings. The paper finds that a double-negative effect on earnings does not appear to hold across the board for all immigrant women, but is quite marked for highly educated women; and that a conventionally estimated rate of earnings adjustment for immigrant women appears much less than that for men and is not at all statistically significant, so that any initial earnings gap relative to native-born women changes very little over the worker's career. -Authors

The economic returns to college major, quality and performance: A multilevel analysis of recent graduates

This paper estimates the impact of three types of qualitative differences in college experiences on the earnings of recent college graduates — college major, school quality and educational performance. The analysis is based on a new statistical technique, known as hierarchical linear modeling (HLM), which distinguishes more precisely between the effects of individual factors and institutional factors on earnings. The results show that all three types of qualitative factors influence initial earnings, but the effects of institutional quality and educational performance are not uniform for graduates with different college majors.

An assessment of the human capital content of international migrants: an application to U.S. immigration.

The authors present a methodology for measuring the magnitude of international migration flows that includes an earnings equation approach as an economic dimension. "Applying our methodology to U.S. immigration, we find considerable variation across source regions in the value of immigrants. Moreover, we find that simply comparing initial earnings without controlling for differences in the characteristics and migration patterns of immigrants from the various source regions can misrepresent the relative earnings potential or value of migrants." (SUMMARY IN FRE AND GER)

Note: Discounting a Partially Tax-Sheltered Income Stream

Abstract No abstract available.

The Earnings of Skilled and Unskilled Immigrants at the End of the Nineteenth Century

Most historical studies of immigration in nineteenth-century America have failed to distinguish among the labor-market experiences of different immigrant groups. Using a sample of some 4000 wage earners from turn-of-the-century Iowa, we examine the relative earnings of skilled and unskilled immigrants and suggest the factors which contributed to their very different post-immigration experiences. The results indicate that prior knowledge of a trade conferred upon immigrants an initial earnings advantage, but that unskilled immigrants managed subsequently to close some but not all of the gap by reaping greater returns to experience on the job.

Longer term impacts of pre-employment services on the earnings of disadvantaged youth

This article presents the results of long-term follow-up evaluations of two youth pre-employment programs—70,001 Ltd. and Jobs for Youth. Participant outcomes for these programs were analyzed using data from two follow-up waves. Participants in 70,001, still showing gains over comparisons in the second follow-up wave, were surveyed in a third wave—covering a period that ranged from 24 to 40 months from intake into the program. The results indicated that participants demonstrated initial earnings gains from these pre-employment programs, but that over time these initial positive effects decayed as comparisons caught up with participants.

AN ANALYSIS OF THE PERMANENT PRICE CHANGE ASSOCIATED WITH COMMON STOCK SPLITS*

THIS STUDY is concerned with an analysis of stock price changes over a period of thirteen months surrounding common stock splits. The purpose of the analysis was to determine whether there is a significant price change associated with stock splits, while controlling for changes in dividends, initial dividend level, change in earnings, initial earnings level, and stock market trend. The effect of other concomitant factors was assumed to average out over the 148 stocks in the study. Some published research (for example, Barker) has concluded that the observed price increase accompanying a stock split is a function of an increase in cash dividends rather than the split itself. The results of this study tend to disagree with Barker's conclusion. Analysis of covariance is the technique employed to test the hypothesis that there is no significant difference between the mean price change of the group of split stocks and the group of nonsplit stocks, after controlling for the effect of the above five concomitant variables. The analysis includes all true stock splits of 2: 1 or greater that occurred during the calendar year 1959 among stocks listed on the New York Stock Exchange. For the purposes of this study, a true stock split is defined as a split in which no part of the retained earnings was capitalized. Seventy-four stocks listed on the New York Stock Exchange that did not split their shares in 1959 were selected at random and were then randomly paired with the split stocks. The price change was determined by expressing the average price of the stock in the fifth month after the split date as a percentage of the average price of the stock in the eighth month prior to the split date. These prices and the control variables were adjusted for any change in the number of shares outstanding. The price change of the nonsplit stock that was randomly matched with each split stock was determined for the same time period. The market trend was included as a control variable by matching each stock with an appropriate Standard and Poor's subgroup stock price index. The percentage change in each index was computed over the same time period and in the same manner as the price change. Unlike the change in stock price and index, the change in earnings and dividends could not be expressed in percentage terms because of the presence of deficits and zero values. The change in dividends was incorporated by the use of two control variables. The dividends per share in the quarter preceding the period under study, the initial dividend, provided the first of these control variables. Any change in this dividend rate prior to the end of the thirteen-month period provided the data for the other dividend control variable. The change in earnings was included in the same manner. The quarterly earnings for the last fiscal quarter prior to the period under study provided the initial earnings variable. The actual difference between these earnings and the earnings in the quarter ending one year later provided the data for change in earnings. Tests of the statistical validity of the data for the two-way analysis of covariance design were carried out and satisfied. The F-test of the difference between the mean