Previous Earnings Research Articles

Time will tell the truth: Performance commitments and earnings management in M&A

This study investigates the impact of performance commitments on the earnings management levels of acquiring firms in the three years following mergers and acquisitions (M&As), as well as the resulting performance reversal phenomenon. The empirical results indicate that listed companies significantly increase their earnings management levels in the three years after making performance commitments. This suggests that firms may engage in upward earnings management during the commitment period to inflate profits and achieve the promised performance. Moreover, our findings reveal that M&A transactions involving stock payments and performance commitments exhibit even higher levels of earnings management. However, such practices are unsustainable; once the commitment period ends, the previous earnings management behavior is gradually rectified, leading to a performance reversal. Further analysis demonstrates that performance commitments result in a significant decline in companies' return on assets (ROA) in the fourth and fifth years post-M&A.

Long-run consequences of informal elderly care and implications of public long-term care insurance

We estimate a dynamic structural model of labor supply, retirement, and informal caregiving to study short and long-term costs of informal caregiving in Germany. Incorporating labor market frictions and the German tax and benefit system, we find that in the absence of Germany’s public long-term insurance scheme, informal elderly care has adverse and persistent effects on labor market outcomes and, thus, negatively affects lifetime earnings and future pension benefits. These consequences of caregiving are heterogeneous and depend on age, previous earnings, and institutional regulations. Policy simulations suggest that while public long-term care insurance policies are fiscally costly and induce negative labor market effects, they can largely offset the personal costs of caregiving and increase welfare, especially for low-income individuals.

The employment consequences of founding an incorporated business among STEM founders: Evidence from Swedish microdata

To what extent do STEM founders benefit from having founded an incorporated business upon returning to employment? Addressing this question would indicate the career value of engaging in entrepreneurship for STEM founders—but an answer remains elusive in the current literature. Drawing on human capital theory, we investigate the earnings consequences for STEM founders who return to employment post-founding a business and whether the earnings are contingent on their rank (managerial versus non-managerial) in the returning organization. Comparing founders to employees with similar characteristics in the STEM labor force in Sweden between 1990 and 2015, we find that founders, on average, earn marginally more (about 1.5%) on returning to employment. However, the earnings are likely to vary significantly depending on rank in the returning organization, as well as other factors such as founders’ age, previous earnings in wage employment, and the size of their employer on return. We discuss the implications for research and practice.

The Endowment Effect on Consumer Economic Behavior

Since the 1990s, the endowment effect was studied in experimental settings. After the 21st century, studies on its application in different fields emerged. The endowment effect is one of the key topics in today's research, and based on the data models and conclusions of the related literature, the paper explores the impact of the endowment effect on consumer economic behavior in the labor market and used car market. It is found that the endowment effect affects consumers' economic behavior through two features: ownership effect and loss aversion. In the labor market, the endowment effect causes employees to overestimate wage expectations, resist lower wages, and refer to previous earnings. In the used car market, the endowment effect causes sellers to overestimate price expectations for used cars, reduce willingness to trade, and irrationally obtain and evaluate information. The endowment effect impacts both markets significantly and negatively. Understanding and utilizing it can improve the efficiency and profitability of market operations.

Asset Volatility and Financial Sustainability

This study observes how companies’ fundamental-based asset volatility impacts their financial sustainability. Accounting literature documents that net assets value accumulates previous earnings management. The asset balance change reflects biased earnings measurement, and abnormal asset fluctuation signals aggressive earnings management. This paper uses delisting as a proxy to observe how asset volatility can interact with abnormal earnings fluctuation to impact firms’ sustainability. The study uses two groups of regression and a Principal Component Analysis (PCA) Logistic Regression approach to observe how asset volatility impacts companies’ delisting risk. It borrows the Six Sigma methodologies to measure the volatility of financial statement items. Then the PCA analysis reduces the data dimensions to twelve factors. The analysis shows that assets’ abnormal fluctuation is a risk signal concurring with the extant earnings management literature. One takeaway from this study is that companies must disclose detailed explanations if asset volatility is beyond a red line. As Statement of Financial Accounting Standards (SFAS) 151 requires direct disclosure of abnormal excess capacity costs, companies must disclose abnormal asset volatility. The paper contributes to the literature from two perspectives. First, this paper captures firms’ sustainability from the accounting perspective with fundamental measures from quarterly financial reports. It provides a comprehensive way to detect aggressive earnings management risks. Second, the PCA logistic regression model offers a comprehensive analysis to derive useful information from many attributes.

ALIRAN KAS, TINGKAT HUTANG, PERBEDAAN ANTARA AKUNTANSI DAN LABA FISKAL PADA PERSISTENSI LABA : BUKTI DARI PERUSAHAAN OTOMOTIF

This study aims to analyze the effect of cash flow, debt levels, book tax differences on profit persistence. The measurement of profit persistence focuses on the regression coefficient of present profit against previous earnings. This research uses data from companies listed on the Indonesia Stock Exchange (IDX) in 2017-2021. The number of research samples was 7 companies obtained by purposive sampling method. The source of research data is secondary data. The analysis technique used in this study is multiple linear regression analysis. The results of the analysis show that cash flow (X1) has no effect on profit persistence, debt level (X2) has no effect on book tax differences (X3) has no effect on profit persistence.

A global analysis of the effectiveness of policy responses to COVID-19

Governments implemented many non-pharmaceutical interventions (NPIs) to suppress the spread of COVID-19 with varying results. In this paper, country-level daily time series from Our World in Data facilitates a global analysis of the propagation of the virus, policy responses and human mobility patterns. High death counts and mortality ratios influence policy compliance levels. Evidence of long-term fatigue was found with compliance dropping from over 85% in the first half of 2020 to less than 40% at the start of 2021, driven by factors such as economic necessity and optimism coinciding with vaccine effectiveness. NPIs ranged from facial coverings to restrictions on mobility, and these are compared using an empirical assessment of their impact on the growth rate of case numbers. Masks are the most cost-effective NPI currently available, delivering four times more impact than school closures, and approximately double that of other mobility restrictions. Gathering restrictions were the second most effective. International travel controls and public information campaigns had negligible effects. Literacy rates and income support played key roles in maintaining compliance. A 10% increase in literacy rate was associated with a 3.2% increase in compliance, while income support of greater than half of previous earnings increased compliance by 4.8%.

Does IFRS 7 Disclosure Weaken Earnings Management? Evidence from Indonesian Conventional Commercial Banks

This study examines the influence of derivative instruments, income diversification, and liquidity ratios on earnings management with IFRS 7 disclosure as a moderating variable. The sample used consists of 129 conventional commercial banks that are listed and 116 banks that are not listed on the Indonesia Stock Exchange (IDX). This study uses moderating regression analysis (MRA) with the Robustness Least Squares with S-Estimation method. This study also conducted a sensitivity analysis with previous earnings management measurements (Kanagaretnam et al., 2010) and an additional test by comparing listed and non-listed banks on the Indonesia Stock Exchange. The empirical results indicate that IFRS 7 disclosure weakens derivative instruments' negative effect and income diversification's positive effect on earnings management but does not provide a moderating effect on liquidity ratios. This study contributes to the bank management and Indonesian banks authority to provides another view of implementing IFRS 7 disclosure that have not been maximized in the Indonesian banking industry. In the future, the researchers expect the authorities to encourage all banks to disclose complete IFRS 7 disclosure to minimize information asymmetry. On the other hand, this study also contributes to the banking management to increase derivative instruments and to carry out more supervision on the provision of income diversification to minimize earnings management. Theoretically, this study contributes to the new earnings managemen t measurement by applying more prudential principles based on the IFRS framework, IFRS 9 and Basel III regulations.

Explaining support for redistribution: social insurance systems and fairness

AbstractWhy do high-income earners support higher levels of income redistribution in some countries than in others? I argue that differences in the social insurance design have consequences for fairness considerations and that this matters for preference formation. Flat-rate systems provide social benefits in equal amounts to everyone in need, while earnings-related systems provide benefits in relation to previous earnings. In the case of income loss, earnings-related systems maintain unfair income differences, while flat-rate systems equalize unfair income differences between the rich and the poor. Cross-national patterns reveal that support for redistribution among the rich is higher in income-maintaining welfare states. For a strict test of my fairness argument, I conduct a laboratory experiment and show that participants reduce inequality more if given endowment differences are maintained in the case of loss.

감사인 자율교체에 따른 이익유연화의 변화

This study examines the effect of a voluntary auditor change on income smoothing. Investigating a sample of public companies for 2011-2018, we find that auditor changes are negatively associated with income smoothing when Big4 audit firms replace non-Big4 audit firms and that auditors consider previous earnings persistence. Overall, this study provides evidence that new auditors perceive income smoothing as opportunistic behavior, and this perspective is more prominent for Big4 audit firms. The results suggest that auditors, compared to investors and credit rating agencies, have a different perspective on income smoothing and auditors

Совершенствование организационной и финансовой моделей содействия занятости в России

The article discusses the basics of employment policy in Russia: the organizational model in terms of delineation of responsibilities between stakeholders, and the financial model in terms of the two basic directions of employment policy — passive, in the form of cash benefits to the unemployed, and active, in the form of programs of employment assistance. The authors show that the Russian model of unemployment benefits has lost its original intent: the benefits have become an analogue of social support, since they are virtually unrelated to previous earnings. The unemployment benefit is, in fact, counter-productive, since it contributes to the growth of registered unemployment (including the so-called “professional unemployment”, when the unemployed are not motivated to find a job). As a result, the resources of the Employment Service are wasted and the prospects of its modernization are put at risk. Regarding active employment programs, the authors highlight the following problem: while the implementation of active labor market programs is the responsibility of subnational governments, the mandatory list of such programs is set by the federal government, which constitutes an unfunded mandate imposed upon subnational government by the federal government. In fact, the measures needed to support employment may vary significantly from territory to territory, and the focus of most existing programs is to support the registered unemployed, while motivated job seekers could use job search support before registering. The authors recommend to reform the organizational and financial models of employment services in Russia, first of all by allowing the regions to design their own employment support policies that take into account the specifics of the local labor market. They also recommend to abolish the current noncontributory unemployment benefit in Russia and to replace it with a means-tested income support benefit for the poor.

Intelligent Supervision and Earnings Management Choice：A Natural Experiment Based on Golden Tax-III

This paper studies the impact of intelligent tax supervision on the decision of corporate earnings management. Companies determine earnings management strategies by weighing the marginal benefits and costs of accrual-based earnings management and real earnings management. Existing literature finds that managers prefer real earnings management than accrual-based earnings management because of regulatory pressure. This paper takes tax costs into consideration and adopts that tax will affect the substitution relationship between different earnings management methods.Accrual-based earnings management is realized by accounting methods. But real earnings management has a direct cash flow effect. Compared with accrual-based earnings management, real earnings management is subject to a higher level of book-tax conformity. Real activity manipulation is more costly due to tax incentives. Intelligent tax supervision represented by Golden Tax-III can effectively realize information integration and reduce information asymmetry between taxpayers and tax authorities. It can help to identify companies whose tax burdens deviate from the industry average. So Golden Tax-III can strengthen tax supervision and significantly increase the tax costs of real earnings management. Then, it can affect earnings management strategies. The higher the degree of tax non-compliance, the greater the impact of the implementation of Golden Tax-III.We use the implementation of Golden Tax-III as an exogenous event to construct a DID test. The results show that: Tax-noncompliant companies have a higher level of accrual-based earnings management after Golden Tax-III; tax-noncompliant companies have a lower level of real earnings management after Golden Tax-III; the substitution relationship between the two earnings management strategies in tax-noncompliant companies is mainly reflected after Golden Tax-III.The main contributions of this paper are as follows: (1) It directly examines the impact of tax costs on earnings management strategies, and finds that companies prefer accrual-based earnings management to real earnings management under strong tax supervision. It also expands the previous earnings management model. The research enriches and supplements the literature on earnings management. (2) It constructs a DID test to examine the impact of tax regulation on earnings management based on the implementation of Golden Tax-III. It can help to solve the problem of self-selection and endogeneity and supplement the relevant literature on tax and earnings management. (3) It finds that the intelligent supervision represented by Golden Tax-III can effectively distinguish tax-noncompliant companies and achieve precise supervision. The results help to understand and evaluate the economic consequences of Golden Tax-III, and also provide enlightenment for the development of intelligent tax supervision and taxation regulatory policy.

Human choices respond to added costs according to the energy budget rule

The energy budget rule is a risk-sensitive optimal foraging model that predicts choice should be risk averse when need levels are relatively easy to meet within a foraging period (positive budget conditions), and risk prone when need levels are more difficult to meet (negative budget conditions). Although research with nonhumans has produced only limited support for the energy budget rule, analogue research with humans has shown that risky choice for monetary outcomes is typically consistent with the model’s predictions. Most human studies have tested the energy budget rule by manipulating minimum requirements, rates of gain, or reserves. The energy budget model also predicts, however, that energy expenditures (costs) can affect risk sensitivity. Two experiments therefore investigated whether monetary costs for choices would affect risk sensitivity. Adults were presented with choices between monetary options in blocks of five trials. Block earnings were paid only if earnings exceeded a minimum amount. Each trial, a monetary cost was subtracted from earnings when a choice was made. Cost magnitude was manipulated across conditions to generate one positive- (cost $0.00) and two negative-budget (cost $0.01 or $0.02) conditions. In Experiment 1, choice options produced the same mean earnings, with one producing a constant amount of money and the other a variable amount. In Experiment 2, both choice options produced the same mean amounts of money but different variances. Similar to previous earnings budget studies, choice varied as a function of budget condition. Trial-by-trial choice patterns were inconsistently predicted by a dynamic optimization model.

Family and government insurance: Wage, earnings, and income risks in the Netherlands and the U.S.

We document new facts about risk in male wages and earnings, household earnings, and pre- and post-tax income in the Netherlands and the United States. We find that, in both countries, earnings display important deviations from the typical assumptions of linearity and normality. Individual-level male wage and earnings risk is relatively high at the beginning and end of the working life, and for those in the lower and upper parts of the income distribution. Hours are the main driver of the negative skewness and, to a lesser extent, the high kurtosis of earnings changes. Even though we find no evidence of added-worker effects, the presence of spousal earnings reduces the variability of household income compared to that of male earnings. In the Netherlands, government transfers are a major source of insurance, substantially reducing the standard deviation, negative skewness, and kurtosis of income changes. In the U.S. the role of family insurance is much larger than in the Netherlands. Family and government insurance reduce, but do not eliminate non-linearities in household disposable income by age and previous earnings in either country.

Sickness Benefits in the EU: Making Sense of Diversity

One of the hallmarks of the European Union (EU) Member States’ social protection systems, unlike that of other regions in the world, is the right to income protection in case of sickness. To differing extents, all EU countries provide three types of arrangements in case of sickness: a) sick leave; b) sick pay; and c) sickness benefits. Sick leave is the right to be absent from work during sickness and to return to one’s job when recovered; sick pay is the continued, time-limited, payment of (part of) the worker’s salary by the employer during a period of sickness; and sickness benefits are provided by the social protection system and are paid as a fixed rate of previous earnings or as a flat-rate amount Sick leave arrangements, and compensation in particular, is a sensitive topic on which the Member States have jealously defended their sovereign powers.

What Do Questions Reveal? Analyst Topic-Specific Skill and Forecast Accuracy

Existing studies identify analyst skills by ex post evaluation of their outputs (forecasts and recommendations), which are contaminated by luck and noise. Using the premises that questions reveal interest and that interest and practice lead to skill, we construct an ex ante analyst topic-specific skill measure based on the frequency of topic-specific questions that analysts raise during previous earnings conference calls. In a supply chain information setting, we show that analysts with supply-chain-specific skill experience a greater improvement in forecast accuracy relative to their peers when the firms they cover establish relationships with important supply chain partners. Analysts with supply-chain-specific skill improve information efficiency in capital markets, as shown by faster information diffusion speed along the supply chain and stronger market reactions to their recommendation updates.

The dividend puzzle: testing the signalling hypothesis in a European context

Dividend policy continues to puzzle researchers in the discipline of finance. In this paper we test the signalling effects of the dividend payout for a set of European firms that had sustained earnings growth for a minimum period of five years with a decline in the last year. To the best of our knowledge this is the first paper to run and compare the results of several different models including the recently created simultaneous-equation model in its linear and nonlinear forms alongside a simple OLS-based estimation. Our results show that managers change dividends to signal equity-scaled earnings prospects instead of asset-scaled earnings. We also find evidence that managers change dividends for signalling previous earnings changes and may distribute dividends to reduce agency costs. These findings suggest that managers identify shareholders as the accepters of dividends and the most direct targets to signalling information.

Nonlinear Household Earnings Dynamics, Self-Insurance, and Welfare

AbstractEarnings dynamics are much richer than typically assumed in macro models with heterogeneous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative and survey data. We estimate two alternative processes for household after-tax earnings and study their implications using a standard life-cycle model. Both processes feature a persistent and a transitory component, but although the first one is the canonical linear process with stationary shocks, the second one has substantially richer earnings dynamics, allowing for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age. Allowing for richer earnings dynamics implies a substantially better fit of the evolution of cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. The richer earnings process implies lower welfare costs of earnings risk.

Are U.S. Companies Too Short‐Term Oriented? Some Thoughts

Today's widespread criticism of U.S. companies as shortsighted and ever willing to sacrifice their future for near‐term profit is by no means new. As the author of this article shows, such charges of short‐termism have a long history that goes back at least 40 years. But as he goes on to point out, if these claims were warranted, then the effects we have been warned about all these years would surely have shown up by now.But it is difficult to find evidence of such effects. For example, a short‐term orientation has not been reflected in any erosion of corporate profitability over time. As the author reports, the ratio of U.S. corporate profits as a percentage of U.S. GDP has not only been on a generally upward trend since the early 1980s, but has never been higher than in the past few years. And corporate spending on R&D has also gone up sharply during this period, from 1.1% of GDP in 1977 to 1.7% in 2016. What's more, evidence of short‐termism has not shown up in either higher amounts of investment, or higher rates of return, by venture capitalists and private equity firms, which are both in a good position to profit from widespread corporate failure to pursue valuable growth opportunities.Nor do stock market investors appear to encourage corporate short‐termism, given their willingness to fund IPOs of companies with no previous earnings, and to assign high price‐earnings multiples to companies, like Amazon and Tesla, whose reported earnings have been modest at best. What's more, the fact that today's P/E and CAPE ratios are at relatively high levels suggests that the market continues to expect significant rates of growth by U.S. companies.Some critics, to be sure, have argued that the high level of corporate buybacks and other distributions of cash, when combined with today's near‐record corporate cash holdings, provide clear evidence of a widespread failure of companies to invest in their future. But as the author notes, such distributions in fact represent a fairly small fraction—only around 20%—of after‐tax corporate net income after infusions of new debt and equity capital are also taken into account.

Is there One Pattern of Earnings Management Motivations Fit all Contexts? An Empirical Study

This paper aims at exploring the effect of the Egyptian context on shaping executives' motives to manage earnings; and identifying the most influential managerial motives: managerial self-interests and external environmental factors. The research adopts an interpretative methodology and interview methods. Interviewees were conducted with twenty managers representing five different companies within industrial and service sectors of the Egyptian economy. The findings of this research suggest that a firm’s context has an influence on shaping managers’ self-interests and that in Egypt the job market is a powerful motive for managing the financial reports, followed by cash bonuses; however, stock-based compensation lacks the power to motivate managers into making such financial improvements. In addition, this paper concludes that environmental motives are more important than motives related to managers’ self-interests, because managers cannot achieve their own interests without complying with the external pressures or motives to manage the financial reports. The principal contribution of this paper is to build on the previous earnings management literature to consider the firms' context while studying managers' motives. It pairs the economic factors with institutional factors to form the main reasons behind: 1) managers’ engagement in earnings management; and 2) the superiority of environmental factors over the managerial self-interests motives. It also sheds light on, there is no one pattern of earning management motivations fit all contexts. This paper also contributes to the new institutional sociology literature by bringing managers’ interests and power into the centre of the conceptual framework.