In this paper, we analyse the differences in wage distributions between the UK and nine European countries in 2001. The data base is the European Community Household Panel (ECHP).
In recent research on labour markets, international comparative studies have been fruitfully exploited to highlight variations in labour market institutions, skill endowments and wage distributions (Blau and Kahn 1996 and 2003). Differences in wage distributions between the US and Canada have been studied by DiNardo and Lemieux (1997) and by Donald, Green and Paarsch (2000). Beaudry and Green (2003) analysed differences between the US and Germany focusing on changes in relative capital endowments.
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The primary objective of this study is to examine the effect of the interaction between two earnings smoothing devices, accrual management and hedging with derivatives, on firm value. Lambert (1984) suggests that devices for smoothing can generally be classified as real actions (e.g., hedging by derivatives) and artificial techniques (e.g., discretionary accruals). The former reduces earnings volatility by directly affecting cash flows, whereas the latter directly affects volatility of publicly reported income. While there is evidence that managers use hedging and discretionary accruals as substitutes to control earnings volatility (e.g., Barton, 2001), no study thus far has addressed the more fundamental question of how this trade-off affects firm value. This question is important because it provides insight into a manager’s incentives for trading off hedging and discretionary accruals at the margin. Moreover, it sheds light on the possible effect on firm value of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
To address this research question, we examine the interaction between accrual management and hedging with derivative instruments for income smoothing in a sample of 477 non-financial corporations with 1,117 firm-years in the period 1994 through 1996. We measure the interaction as the relative use of discretionary accruals in the earnings-smoothing program that uses both derivatives and discretionary accounting techniques to dampen earnings volatility. We refer to this measure as proportional accrual management (PAM). We estimate the cross-sectional modified Jones’ (1991) model (see Dechow et al., 1995) to obtain our measure of discretionary accruals. Consistent with previous studies (e.g., Guay and Kothari, 2003), we use a gross notional principal of derivatives holdings to capture a firm’s derivatives positions. Lagged total assets scale both discretionary accruals and derivatives positions.
