Earnings Volatility, the Use of Financial Derivatives and Earnings Management: Evidence from an Emerging Market

In the face of crises such as Covid-19, businesses become devastated by greater risk exposure, particularly in currency exchange, supply chain disruption, and fluctuation in commodity prices that cause volatile earnings trends. Higher earnings volatility is frequently associated with greater risk. Consequently, firms could be inspired to engage in earnings management or derivative use as attempts to mitigate earnings volatility. Using a sample of 169 of the largest non-financial firms with 507 firm-years observations from an emerging market, the researchers examined the relationship among derivative use, earnings volatility, and earnings management. The results of a panel regression analysis showed that derivative use by Malaysian public listed companies was positively connected with earnings volatility, inferring that the use of derivatives did not mitigate earnings volatility as intended. This study also found that both earnings volatility and derivative use have a positive relationship with earnings management. This implies that firms engage in earnings management to curb earnings volatility under circumstances where derivative use is associated with higher earnings volatility. Evidence derived from this study contributes to extant literature on financial risk management involving financial instruments, an area that is very much understudied in the contexts of emerging markets.

Labor Market Trajectories for Community College Graduates: How Returns to Certificates and Associate's degrees Evolve Over Time

We estimate labor market returns to terminal associate's degrees and certificates, with a particular focus on how returns for different credential types evolve over a longer period of time (11 years post entry) than most of the prior literature. We also explore how returns vary depending on labor market conditions and on which labor market outcome metric is used. Using administrative data from Ohio and an individual fixed-effects approach, we find that the value of an associate's degree grows substantially after graduation, and this finding is robust to choice of specification and outcome. The returns to a long-term certificate are flat over time in our main specification, but more sensitive to assumptions about individual-specific earnings trends. Returns to associate's degrees are notably higher in recession years versus pre-recession years. Finally, we find that associate's degrees lead to improved outcomes relative to non-completion across a range of metrics, including higher paying jobs, more stability in employment over time, and a greater likelihood of earning a living wage, while certificates generally pay off via the employment margin and a reduced likelihood of claiming unemployment insurance.

Automation, Occupational Earnings Trends, and the Moderating Role of Organized Labor

Routine-biased technological change has emerged as the dominant explanation for the differential earnings growth of occupations at greater risk of automation, such as machine operators or office clerks, relative to less routine occupations. In contrast, this paper finds that the declining earnings returns to an occupation’s routine task intensity (RTI) can largely be attributed to the decline of organized labor. Using individual-level data on 3.3 million employed adults across the United States from 1983 to 2017, this paper finds that organized labor has two countervailing effects on occupations at greater risk of automation. First, higher union coverage within a state and industry inhibits the decline in earnings returns to an occupation’s RTI. Second, higher union coverage hastens the decline in employment shares of occupations with higher RTI. The result is that occupations at greater risk of automation experience more favorable earnings growth where unions are more resilient, but at the cost of accelerated declines in their employment shares. Counterfactual analyses demonstrate that if union coverage in the United States had remained stable at 1983 levels, the earnings returns to an occupation’s RTI might not have declined from 1983 to 2017, and the observed pattern of occupational earnings polarization in the 1990s might not have occurred. However, the mean RTI of occupations might have declined by an additional 21 percent from 1983 to 2017 relative to the observed decline. The findings suggest that the social consequences of automation are conditional on the strength of organized labor.

Automation, Occupational Earnings Trends, and the Moderating Role of Organized Labor

Routine-biased technological change has emerged as the dominant explanation for the differential earnings growth of occupations at greater risk of automation, such as machine operators or office clerks, relative to less routine occupations. In contrast, this paper finds that the declining earnings returns to an occupation’s routine task intensity (RTI) can largely be attributed to the decline of organized labor. Using individual-level data on 3.3 million employed adults across the 50 United States from 1983-2017, this paper finds that organized labor has two countervailing effects on occupations at greater risk of automation. First, higher union coverage within a state and industry inhibits the decline in earnings returns to an occupation’s RTI. Second, higher union coverage hastens the decline in employment shares of occupations with higher RTI. The result is that occupations at greater risk of automation experience more favorable earnings growth where unions are more resilient, but at the cost of accelerated declines in their employment shares. Counterfactual analyses demonstrate that if union coverage in the U.S. had remained stable at 1983 levels, the earnings returns to an occupation’s RTI might not have declined from 1983-2017, and the observed pattern of occupational earnings polarization in the 1990s might not have occurred. However, the mean RTI of occupations might have declined by an additional 21 percent from 1983-2017 relative to the observed decline. The findings suggest that the social consequences of automation are conditional on the strength of organized labor.

Recognition versus Disclosure of Future Loss Conditions and the Decision-Usefulness of Financial Statements

ABSTRACT We conduct an experiment to investigate the differential effect of recognizing versus disclosing reasonable and supportable forecasts of future loss conditions on investors' valuation assessments when economic fundamentals either deteriorate or improve. Our main finding is that when entities enjoy growth at constant risk, the accelerated recognition of future loss conditions can induce valuation assessments that are opposed to the entity's enhanced valuation. Supplementary analyses reveal that investors misattribute (some) expected losses to the entity's past performance and rely on unadjusted current summary earnings to assess the entity's prospects. Our findings provide insight into the cognitive processes that lead investors to incorrectly assess earnings trends and inform regulators, standard setters, investors, and preparers that the accelerated recognition of relevant and unbiased forward-looking loss estimates can impair the decision-usefulness of financial statements.

Do firms use early guidance to disclose the effect of conservatism on future earnings?

Purpose By deferring profits and anticipating losses, conservatism makes earnings increases more persistent and earnings declines more likely to revert. Therefore, the level of conservatism in current earnings has implications for future earnings expectations. Past research shows that outsiders can fail to understand these implications. This paper aims to investigate whether firms help outsiders by voluntarily disclosing their expectations about how conservatism will affect future earnings trends. Design/methodology/approach The authors examine the likelihood and content of “early” earnings guidance – i.e. guidance about future earnings that is released around or before the announcement of current earnings. The sample is made of 8,820 annual earnings announcements, 62 per cent of which are combined with early guidance. Findings The authors find that the more conservative current earnings, the higher: the likelihood that the firm releases early guidance; the likelihood that the firm predicts a positive change in earnings; and the difference between the forecasted earnings and current earnings. The authors also find such guidance to be relevant to analysts, who use it to update their forecasts. Practical implications By showing that firms use early guidance to disclose the effect of conservatism on future earnings, the study is interesting to users and preparers because it shows that analysts need and use such disclosure; and regulators because it alleviates concerns about the information consequences of conservatism. Originality/value The findings show that firms do not refrain from committing to positive early guidance to disclose the earnings effects of conservatism. This is interesting in light of the difficulty of predicting such effects, the manager incentives to keep expectations low and the cost of committing to positive guidance instead of less risky qualitative disclosure alternatives. In this way, the authors contribute to the literature on the interrelation between voluntary disclosure and conservatism in financial reports.