The Information Content of Cost Behavior Components: Evidence from Labor Market Flows

We examine the information content of cost behavior components in firms’ asymmetric cost function, namely, aggregate-level elasticities of costs with respect to sales increases vs. decreases. We show that the persistence of the elasticity of costs is higher for sales increases than for sales decreases. Using business-level job flows from the Business Employment Dynamics (BED) dataset, which has recently been made available by the BLS, we find that, after accounting for GDP growth and other macroeconomic indicators, the aggregate elasticity of costs with respect to sales increases explains gross job inflows, but not gross job outflows. On the other hand, the aggregate elasticity of costs with respect to sales decreases explains gross job outflows, but not gross job inflows. When we include both elasticities in the regression, both are significant but with opposite signs. We obtain similar results in vector autoregression (VAR) models. Additional tests indicate that: (a) the effect of aggregate elasticity of costs with respect to sales decreases is more pronounced in periods with high uncertainty; and (b) asymmetric cost models explain more of the variation in job outflows than models that assume symmetric cost responses

Credit Ratings and Earnings Management around IPOs

This study examines the impact of having a credit rating on earnings management (EM) through accruals and real activities manipulation by initial public offering (IPO) firms. We find that firms going public with a credit rating are less likely to engage in income-enhancing accrual-based and real EM in the offering year. The monitoring by a credit rating agency (CRA) and the reduced information asymmetry due to the provision of a credit rating disincentivise rated issuers from managing earnings. We also suggest that the participation of a reputable auditing firm is crucial for CRAs to effectively restrain EM. Moreover, we document that for unrated issuers, at-issue income-increasing EM is not linked to future earnings and is negatively related to post-issue long-run stock performance. However, for rated issuers, at-issue income-increasing EM is positively associated with subsequent accounting performance and is unrelated to long-run stock performance following the offering. The evidence indicates that managers in unrated firms generally manipulate earnings to mislead investors, while managers in rated firms tend to exercise their accounting and operating discretion for informative purposes