© UCI Paul Merage School of Business, University of California - Irvine, CA 92697-3125
The Paul Merage School of Business
University of California
Irvine, CA 92697-3125
University of California
Irvine, CA 92697-3125
© UC Irvine
Professor(s): Professor Joanna Ho
Co-author(s): Fu-Hsuan Hsu and Chialing Lee
Accepted at: Journal of International Accounting Research
This study examines how the alignment between business strategy (prospector vs. defender) and Corporate Social Responsibility (CSR) affects company performance. There are different types of CSR; some involve internal stakeholders and others involve external stakeholders. Whereas external CSR may bring public visibility and company prestige, internal CSR can strengthen employee relations. Using data from U.S. publicly listed companies, which is readily available, we find a stronger positive relation between external (internal) CSR and financial performance for prospector (defender) companies than for defenders (prospectors). These results are robust using alternative measures for strategy, internal CSR, and external CSR. We further find that the positive relation is more pronounced for multinational companies than for domestic companies. Our study contributes to the extant literature on international accounting, CSR, and business strategy. Our findings have significant implications for managers in global markets because they demonstrate that different types of CSR can increase company competitive advantages and simultaneously advance social and economic conditions.
Professor(s): Professor Joanna Ho
Co-author(s): Cody Lu and Lorenzo Lucianetti
Accepted at: Management Decision
We examine whether and how two firm-level factors jointly moderate the relation between corporate social responsibility (CSR) activities and firm performance: (1) the “alignment” between a firm’s CSR activities and risk preferences and (2) performance measurement systems (PMS). Using survey responses from top managers of private Italian companies and matching archival data on the financial performance of these companies, we show that the positive effect of CSR activities on firm performance is contingent upon CSR risk alignment, which creates competitive advantages, and the extent to which the firm’s PMS are supportive of its strategic initiatives. Our finding suggests that to extract economic benefits from CSR activities, firms must align CSR activities with their risk preferences and rely on PMS to overcome the causal ambiguity between CSR activities and competitive advantage. Overall, our study contributes to both the CSR-firm performance and consequences of PMS literature and holds significant practical implications.
Professor(s): Chenqi Zhu
Co-author(s): Svenja Dube
Accepted at: Journal of Accounting Research (Journal on Financial Times Top 50 list)
We examine how firms respond to the increased workplace transparency due to the coverage on Glassdoor.com, which collects and disseminates reviews on employee satisfaction. Leveraging the staggered timing of first-time reviews on Glassdoor, we use a difference-in-differences design and find that after being reviewed on Glassdoor, firms improve their workplace practices, measured by corporate social responsibility scores on employee relations and diversity. Consistent with firms improving their workplace practices to remain competitive on the labor market, we find that such improvement concentrates in firms with negative initial reviews and with high labor intensity. We also find firms increase disclosures about workplace practices after being reviewed and the increase concentrates in firms with high institutional ownership, consistent with firms providing more disclosures to appease investors. Overall, our findings suggest that the increased workplace transparency through social media has a disciplinary effect on corporate policies.
Professor(s): Ben Lourie and Terry Shevlin
Co-author(s): Qin Li (recent PhD graduate) and Alex Nekrasov (former Merage faculty)
Accepted at: Management Science (Journal on Financial Times Top 50 list)
Employee turnover is a significant cost for businesses and a key human capital metric, but firms
do not disclose this measure. We examine whether turnover is informative about future firm performance using a large panel of turnover data extracted from employees’ online profiles. We find that turnover is negatively associated with future financial performance (one-quarter ahead ROA and sales growth). The negative association between turnover and future performance is stronger for small firms, for young firms, for firms with low labor intensity, when the local labor market is tight, and when the firm is trying to replace departing employees. The negative association disappears when turnover is very low, suggesting that a certain amount of turnover can be beneficial. Consistent with the concern that turnover increases operational uncertainty, we find a positive association between turnover and the uncertainty of future financial performance. Finally, we find a significant association between turnover and future stock returns, suggesting that investors do not fully incorporate turnover information. Our findings answer the call from the SEC to determine the importance of turnover disclosure.
Professor(s): Siew Hong Teoh
Co-author(s): Linna Shi and Jian Zhou
Accepted at: Journal of Accounting, Auditing, and Finance
We investigate whether board-interlocked firms via an audit committee (AC) board member exhibit correlated non-audit service (NAS) purchases and whether financial reporting quality and future firm performance vary with the amount of correlated NAS purchases from the AC interlock. We find that AC-interlocked firms have positively correlated total NAS and three NAS sub-types – Tax, Assurance, and Other – in the overall sample period from 2000-2016, and in each of the sub-periods pre- and post-SOX. Firms with a larger NAS component that is explained by the AC interlock tend to exhibit lower financial reporting quality. We also find evidence that firms with higher AC-interlocked NAS purchases are associated with lower future performance, although this association exists only in the pre-SOX period. Overall, the evidence suggests that greater NAS purchases among AC interlocked firms can have a detrimental effect on financial reporting quality and auditor independence. While these detrimental effects are concentrated in the pre-SOX period when there were less restrictions on NAS purchases, we find some evidence that the association with lower financial reporting quality persists in the post-SOX period.
Professor(s): Radhika Lunawat
Co-author(s): Timothy Shields and Gregory Waymire
Accepted at: Journal of Accounting and Economics (Journal on Financial Times Top 50 list)
Philosophers and social scientists have long suspected that people will behave differently when they know their actions are observed by or become known to others. We hypothesize that financial reporting reveals managers’ actions and leads them to take different actions that better align with investor interests. We test this hypothesis with an experiment in which we manipulate the availability of a financial report that makes managerial actions transparent. Our evidence shows that financial reporting leads a manager to choose reinvestment and resourcesharing actions that are better aligned with investor interests, even in a setting where the investor can impose no cost or confer no reward on the manager. This same effect holds in a setting where the investor can shut down the firm at any point and take a sizable portion of the assets. Our evidence is important because it suggests that financial reporting’s economic value comes not only from its traditional contracting function, but also because managers care about the moral evaluations of them by investors that are enabled by financial reporting.
Professor(s): Terry Shevlin
Co-author(s): Niklas Lampenius and Arthur Stenzel
Accepted at: Journal of Accounting and Economics (Journal on Financial Times Top 50 list)
We develop an approach based on publicly available data to decompose and quantify tax avoidance into two separate components: tax rate avoidance and tax base avoidance. Our measures are based on the average statutory tax rate, which accounts for the statutory tax rates across all transactions of a firm. We illustrate and validate our measures using simulation data, the Tax Reform Act of 1986, the Tax Cuts and Jobs Act of 2017, changes in tax rate avoidance and tax base avoidance across time, bonus depreciation time periods, several sample splits of U.S. multinational and domestic firms, differences across industries, and firms operating in tax haven locations. The measures allow regulators and researchers to gain insights into these two conceptually different tax avoidance strategies.
Professor(s): Terry Shevlin
Co-author(s): Jinshuai Hu and Siqi Li
Accepted at: Review of Accounting Studies (Journal on Financial Times Top 50 list)
Income taxes are a major expense for profitable corporations, oftentimes 25 percent or more of pretax income. This study exploits a setting – the market for corporate control – to test competing agency-based and risk-based explanations of corporate tax planning. Exploiting the staggered enactment of M&A laws across countries that increased the threat of takeover as an exogenous shock that allows a powerful difference-in-differences design, we find a significant reduction in tax avoidance following the takeover law passage. Our analysis suggests that reduced management private benefits consumption (i.e., rent extraction), rather than managerial effort aversion or increased risk concerns associated with aggressive tax strategies, is the likely mechanism through which takeover laws impact tax avoidance. Collectively, our findings extend the literature by highlighting the role of the corporate control market in shaping cross-sectional variation in corporate tax avoidance.
Professor(s): Siew Hong Teoh and Shijia Wu (Merage Doctoral Candidate)
Co-author(s): Alex Nekrasov
Accepted at: Review of Accounting Studies (Journal on Financial Times Top 50 list)
We propose the visual attention hypothesis, that visuals in firm earnings announcements increase attention to the earnings news. We find that visuals in firm Twitter earnings announcements are associated with more retweets, consistent with greater user engagement with announcements with visuals. This result holds for earnings tweets sent by the same firm and on the same day in firm-level and tweet level analyses. Consistent with managerial opportunism, firms are more likely to use visuals in their earnings tweets when performance is good but less persistent. Consistent with visuals increasing investor attention, the initial return response to earnings news is stronger and the postannouncement response lower when visuals are used. Our evidence of a post-announcement return reversal indicates that visuals can be a double-edged sword. Furthermore, the higher ERC from visuals is more pronounced on days with high investor distraction (when many other firms are also announcing earnings).
Professor(s): Ben Lourie and Devin M. Shanthikumar
Co-author(s): Tiana Lehmers (Merage PhD ’18)
Accepted at: Review of Accounting Studies (Journal on Financial Times Top 50 list)
Using unique new data, we examine whether brokerage trading volume creates a conflict of interest for analysts. We find that earnings forecast optimism is associated with higher brokerage volume, even controlling for forecast and analyst quality, recommendations, and target prices. However, forecast accuracy is also significantly associated with higher volume. When analysts change brokerage firms, they bring trading volume with them, influencing trading volume at the new brokerage house. This indicates that analysts drive the volume effects we observe. Consistent with a reward for generating volume, brokerage houses are less likely to demote analysts who generate more volume. Finally, analysts strategically adjust forecast optimism based on expected volume impact. Analysts become more (less) optimistic if their optimistic forecasts in the prior year were more (less) successful at generating volume. However, consistent with higher costs to increasing accuracy, analysts do not update accuracy based on expected volume impact. Overall, our results are consistent with a brokerage trading volume conflict of interest moving analysts towards more optimistic earnings forecasts, despite the volume reward for accuracy.
Professor(s): Terry Shevlin
Co-author(s): Qin Li (Merage PhD ’16) and Mark (Shuai) Ma
Accepted at: Journal of Accounting and Economics (Journal on Financial Times Top 50 list)
To constrain the use of intangible assets in tax-motivated state income shifting and thus crack down on corporate tax avoidance, many U.S. state governments adopted addback statutes. Addback statutes reduce the state tax benefits that firms can gain from creating intangible assets such as patents. Using a large sample of U.S. public firms, we examine the effect of addback statutes on corporate innovation behavior. First, the adoption of addback statutes leads to a 4.77 percentage point decrease in the number of patents and a 5.12 percentage point decrease in the number of patent citations. Second, the “disappearing patents” resulting from addback statutes have significant economic value. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in zero-tax states, whereas the number of patents that the firm assigns to the other states does not change. Overall, our findings suggest that addback statutes impede corporate innovation.
Professor(s): Joanna Ho
Co-author(s): Ya-Hsueh Chuang and Chialing Lee
Accepted at: China Accounting and Finance Review
This study examines how controlling family ownership and foreign institutional ownership affect companies’ use of nonfinancial performance measures (NFPMs). We conducted two surveys (one in 2005 and the other in 2015) with the publicly listed companies and used the archival data from the 254 respondent companies in Taiwan. Our results with the 2005 data show that foreign institutional ownership increases the use of NFPMs, while family control is not associated with the extent of the use of NFPMs. After 10 years, we find that both controlling families and foreign institutional ownership enhance the use of NFPMs from the full sample. Furthermore, the combined sample data reveals that controlling families demand more NFPMs when the CEO is a non-family member. These results suggest that foreign institutional ownership increases the use of nonfinancial performance measures, shedding additional light on the trade-off between monitoring mechanisms and the design of optimal performance measures.
Professor(s): Joanna Ho
Co-author(s): Dipankar Ghosh, Jong-Yu Paula Hao (Merage PhD ’18), and Hiroshi Miya
Accepted at: Asia Pacific Journal of Accounting and Economics
This study examines the impact of a change in the bonus-based incentives on firm performance and promotions. We use both a proprietary dataset and a field-based survey of a leading bakery chain in Japan that changed its bonus determination from focusing on nonfinancial measures to financial measures. We find that firm performance declines under the new bonus plan due to a misalignment between the choice of performance measures and the bakery’s customer-focused strategy. Moreover, supervisors consider performance measures other than what is intended by the firm for promotions (i.e. financial measures) when they perceive these measures to be underweighted from the perspective of temporal alignment of the incentive system. This study contributes to prior literature by documenting the impact of a change in bonus plan on firm performance and promotions decisions, where empirical evidence is limited.
Professor(s): Ben Lourie
Co-author(s): Siew Hong Teoh, Peng-Chia Chiu, and Alex Nekrasov
Accepted at: Management Science (Journal on Financial Times Top 50 list)
We study how institutional investor attention to a firm affects the timeliness of analysts’ forecasts for that firm. We measure abnormal institutional attention (AIA) using Bloomberg news search activity for the firm on earnings announcement days. We find that analysts issue more timely forecasts when AIA is high on the earnings announcement day. Analyst responsiveness to AIA is stronger when analysts have more resources and experience and weaker when the AIA of other covered firms is high. Analysts who respond more to AIA are more likely to be named all-star analysts and less likely to be demoted to a smaller brokerage. We address endogeneity concerns using a measure of expected AIA that is unaffected by concurrent information. Our findings suggest that responsiveness to institutional attention influences the production of analyst research and analysts’ career outcomes.
Professor(s): Radhika Lunawat
Co-author(s): Gregory Waymire and Baohua Xin
Accepted at: Contemporary Accounting Research (Journal on Financial Times Top 50 list)
A common view is that verified earnings reports encourage investment through improved transparency. We lack direct evidence on this foundational proposition because researchers cannot observe counterfactuals where a manager either: (1) must remain silent about performance or (2) can make any statement about performance she desires, even a bald-faced lie. We experimentally manipulate whether a manager can provide information to an investor either by voluntarily disclosing a verified earnings report, communicating freely via unverifiable cheap talk, or both. Our experiment involves repeated interactions between an uninformed investor with funds that, if invested, generate uncertain gains, and a trusteemanager who observes and then divides gains after they are realized. We hypothesize and find that: (1) the provision of a verified earnings report leads to higher investment compared to a world where reporting is not possible, and (2) the provision of a verified earnings report leads to more accurate cheap talk communication than when earnings reports are unavailable. Contrary to our prediction, we find that investment when both earnings reports and cheap talk are possible is statistically indistinguishable from investment when only cheap talk communication is available. Further tests reveal that a lack of verified earnings reports leads managers to sustain a partner’s investment by providing high returns to the investor while also limiting (but not completely eliminating) deceptive communication and profit-taking. Our main conclusion is that verified earnings reports promote investment on a stand-alone basis by improving transparency, but the effect of greater transparency from earnings reports on investment is more nuanced when earnings reports can influence the disclosure of unverifiable information. The main implication of our evidence is that the greater transparency of management behavior with verified earnings reports is not unambiguously positive since making behavior more transparent can lead managers to change their behavior.
Professor(s): Radhika Lunawat
Accepted at: Journal of Behavioral and Experimental Economics
This experiment examines forecasting behavior under varying information conditions to assess the extent to which traders in security markets incorporate information in trading activity to resolve fundamental uncertainty and to resolve higher-order uncertainty. Fundamental uncertainty refers to a trader’s uncertainty about liquidation value of the asset while higher-order uncertainty refers to uncertainty about the beliefs of other traders about liquidation value of the asset. I find that in an experimental security market, subjects incorporate the information contained in trading activity to the extent of about 88% to resolve both fundamental uncertainty and higher-order uncertainty. When a piece of public information (the information content of which is comparable to the information contained in trading activity) is made available to the subjects, then also the incorporation of available information remains in about the same range as reported with the first set of experiments. The inability and / or refusal to incorporate 100% of the information contained in trading activity is almost entirely attributable to an inability and / or refusal to Bayesian update. The refusal to Bayesian update is consistent with several other theories and allows post-trading forecasts to be significantly correlated with pre-trading forecasts.
Professor(s): Terry Shevlin
Co-author(s): Alex Edwards and Adrian Kubata
Accepted at: The Accounting Review (Journal on Financial Times Top 50 list)
We develop a linear corporate tax function where taxes paid are regressed on pre-tax income and an intercept. We show that if the intercept is positive, cash ETRs are a convex function of pre-tax income. We present large sample evidence consistent with this ETR-convexity. Thus, although firms may have stable linear tax functions (i.e., constant parameters in the linear tax model) representing stable tax avoidance behavior, ETRs can change over time because of growth in pre-tax income. Consequently, simply examining changes (or differences) in cash ETRs is nondiagnostic about whether tax avoidance has changed over time (or differs across firms). We illustrate our argument by showing that all of the observed downward trend in cash ETRs documented by Dyreng et al. (2017) can be explained by growth in pre-tax income. The wholesale concern about increased tax avoidance over time might be overstated.
Professor(s): Terry Shevlin & Doctoral Candidate Shaphan Ng
Co-author(s): Yoojin Lee (Merage PhD ’17) and Aruhn Venkat (Merage PhD ’20)
Accepted at: The Accounting Review (Journal on Financial Times Top 50 list)
We examine whether employee perceptions of managers and firms fall following tax avoidance news. Using S&P 500 firms and generalized difference-in-differences specifications, we find that tax avoidance news negatively affects employee perceptions of managers and firms. In cross-sectional tests, we find that (1) firms and managers in consumer-facing industries suffer larger employee-related perception changes from tax avoidance news compared to other firms, and (2) well-performing firms and their managers face smaller perception changes than other firms and managers. Overall, our results are consistent with tax avoidance news negatively affecting employee perceptions of managers and firms.
Professor(s): Terry Shevlin
Accepted at: Journal of International Accounting Research
Economics-based tax research in accounting draws heavily on the Scholes and Wolfson framework. The framework develops a global approach to tax planning where all parties, all taxes, and all costs are to be considered in effective tax planning. Effective tax planning is distinct from tax minimization as the goal of the former is to maximize the aftertax rate of return. The first empirical applications of the framework followed the passage of the Tax Reform Act of 1986. Taxation of multinationals has long been of interest to accounting (and other) researchers and continues to be of interest. The Tax Cuts and Jobs Act of 2017 changed many tax laws including how the U.S. taxes U.S. multinationals. Research examining the ramifications of this latest Tax Act is already well under way.
Professor(s): Siew Hong Teoh
Accepted at: Management Science (Journal on Financial Times Top 50 list)
Trademarks are often registered when new products/services are launched commercially to protect intellectual property. We find that the number of new trademark registrations predicts significantly higher future profitability, higher stock returns, and more underreaction by analysts in their earnings forecasts. Investors react positively to trademark registration events, but insufficiently, given the positive return predictability. Using the Federal Trademark Dilution Act (FTDA) as an exogenous shock that enhanced trademark protection, we find that the trademark predictability was significantly strengthened during the seven years after the FTDA was enacted. The return predictability is stronger in harder-to-value firms: larger, more opaque, higher analyst disagreement, lower advertising expenses, and higher R&D spending; and in new product/service trademark categories. The return predictability is also stronger among industries with higher rates of oppositions to trademark registrations, a proxy of trademark value. Collectively, the evidence is more consistent with investors’ undervaluation of new trademark registrations rather than a riskbased story, especially where analysts undervalue the trademarks and the cost to investors of paying attention is high.
Professor(s): Siew Hong Teoh
Co-author(s): Ben Lourie, Peng-Chia Chiu and Alex Nekrasov
Accepted at: Management Science (Journal on Financial Times Top 50 list)
We study how institutional investor attention to a firm affects the timeliness of analysts’ forecasts for that firm. We measure abnormal institutional attention (AIA) using Bloomberg news search activity for the firm on earnings announcement days. We find that analysts issue more timely forecasts when AIA is high on the earnings announcement day. Analyst responsiveness to AIA is stronger when analysts have more resources and experience and weaker when the AIA of other covered firms is high. Analysts who respond more to AIA are more likely to be named all-star analysts and less likely to be demoted to a smaller brokerage. We address endogeneity concerns using a measure of expected AIA that is unaffected by concurrent information. Our findings suggest that responsiveness to institutional attention influences the production of analyst research and analysts’ career outcomes.
Professor(s): Terry Shevlin and Doctoral Candidate Aruhn Venkat
Accepted at: Contemporary Accounting Research
Joshi, Outslay, and Persson (2020) examine EU multinational banks’ taxmotivated income shifting within financial affiliates following a requirement that banks report country by country financial results for their financial affiliates. They find reduced income shifting within financial affiliates consistent with mandated disclosures altering banks shifting behavior. They also examine overall tax avoidance and conclude banks did not change their overall tax avoidance. We discuss how this paper fits into the broad tax literature through the lens of the Scholes-Wolfson framework: non-tax costs, shifting income from one pocket to another, and tax avoidance. We also contextualize the paper in the broad literature on the effects of mandated accounting disclosure (e.g. lease accounting, pension accounting and OPEB) and the more specific literature on the effects of mandated tax disclosures. We then provide some specific comments related to the paper focusing on the setting, reasons why we would expect changes in income shifting, problems with the data, a discussion of empirics, possible cross-sectional predictions, and a discussion of the role of control samples in a difference-in-differences design. We conclude with a brief discussion of the policy implications assuming one takes the results at face value, which we caution against.
Professor(s): Joanna Ho
Co-author(s): Lingsha Cheng and Ruijun Zhang
Accepted at: China Accounting and Finance Review
This paper examines how executive payperformance sensitivity (PPS) affects the relationship between derivatives usage and firm risk and whether this effect is conditional on government regulation. Using a sample of Chinese-listed companies over the period 2008 to 2015, we observe that performance-based executive compensation contracts have a U-shaped effect on the relationship between derivatives usage and firm risk. Further analyses show a negative relationship between executive compensation and risk-premium-related derivatives usage when the government heightens its regulations. This suggests government regulation can effectively complement executive compensation contracts to lower firm risk through derivatives usage. The results are robust after we address endogeneity concerns and a battery of sensitivity tests. Our findings not only add to the literature on derivatives usage and corporate governance but also have policymaking implications for other developing countries.
Professor(s): Chuchu Liang, Chenqi Zhu
Co-author(s): Sudipto Dasgupta and Kuo Zhang
Accepted at: Journal of Financial and Quantitative Analysis
We show that prior social connections can mitigate hold-up in bilateral relationships and encourage relation-specific investment and cooperation when contracts are incomplete. We examine vertical relationships and show that relation-specific innovative activities by suppliers increase with the existence and strength of prior social connections between the suppliers’ managers and board members and those of their customers. To establish causality, we exploit connection breaches due to manager/director retirements or deaths and find that innovation drops for affected suppliers after the departure of socially connected individuals relative to unaffected suppliers. Our work sheds light on how social connections can shape the boundary of the firm.
Professor(s): Chuchu Liang
Co-author(s): Kai Wai Hui, P. Eric Yeung
Accepted at: Review of Accounting Studies
We test two potential hypotheses regarding the effects of major customer concentration on firm profitability. Under the collaboration hypothesis, customer power facilitates collaboration and both the supplier firm and its major customers obtain benefits. Under the competition hypothesis, customer power results in rent extraction and the major customers benefit at the expense of the supplier firm. We document that major customer concentration is negatively associated with the supplier firm’s profitability but positively associated with the major customers’ profitability. We demonstrate that these effects weaken as the supplier firm’s own power grows over its relationship with major customers, supporting the competition hypothesis. We carefully reconcile our results with prior findings that focus only on the supplier firm’s profitability and identify their research design and interpretation problems. We obtain similar inferences in a setting of major customers’ horizontal mergers and when we use an alternative measure of major customer power.
Professor(s): Ben Lourie
Co-author(s): Dan Givoly, Yifan Li (Former PhD Student at UCI), Alexander Nekrasov (Former Professor at UCI)
Accepted at: Review of Accounting Studies
The documented decline in the information content of earnings numbers has paralleled the emergence of disclosures, mostly voluntary, of industry-specific key performance indicators (KPIs). We find that the incremental information content conveyed by KPI news is significant for many KPIs, yet it is diminished when details about the computation of the KPI are absent or when the computation of the KPI changes over time. Consistent with analysts responding to investor information demand, we find that analysts are more likely to produce forecasts for a KPI when that KPI has more information content and when earnings are less informative. We also analyze the properties of analysts’ KPI forecasts, and we find that KPI forecasts are more accurate than mechanical forecasts, and their accuracy exceeds that of earnings forecasts. Our study contributes to the literature on the information content of KPIs and increases our understanding of the factors that affect this content. We provide evidence pertinent to the debate on whether and how to regulate KPI disclosures. This study further contributes to research on the properties of analysts’ forecasts.
Professor(s): Ben Lourie and Terry Shevlin
Co-author(s): Elizabeth Gutiérrez and Alex Nekrasov (Past Merage Faculty)
Accepted at: Management Science
Human capital is a key factor in value creation in the modern corporation. Yet the disclosure of investment in human capital is scant. We propose that a company’s online job postings are disclosures made outside of the investor relations channel that contain forward-looking information that could be informative to investors about future growth. We find that changes in the number of job postings are positively associated with changes in future performance and that this relation is stronger when postings likely represent growth rather than replacement. Consistent with job postings providing new information to the market, investors react positively to changes in the number of job postings. The market reaction to postings is stronger when firms are likely to be hiring for growth rather than replacement and for firms with low labor intensity (and therefore high marginal productivity of labor).
Professor(s): Devin M. Shanthikumar, Siew Hong Teoh
Co-author(s): Brad Baderstcher
Accepted at: The Accounting Review
We examine whether misvaluation of publicly traded industry peers is associated with capital expenditures by privately-held firms. An economic competition hypothesis predicts a negative relation because misvaluation-induced new investment by public firms crowds out investment by private firms when they share common input or output markets. An alternative shared sentiment hypothesis predicts a positive relation because private firm stakeholders share in the sentiment associated with misvaluation in public markets. Misvaluation is proxied using both the price-to-fundamental ratio and an exogenous instrument obtained from mutual fund flows. The evidence is consistent with the shared sentiment hypothesis, and robust to alternative treatments for growth opportunities. We find expected cross-sectional variation in the strength of the positive relation between public-peer misvaluation and private firm investment. Our results indicate that private firms finance misvaluation-induced investment primarily internally or externally with debt, not equity. Finally, misvaluation-induced investment increases future return on investment for private firms in contrast with public firms. Overall, these findings suggest that overvaluation in public markets increases private firm investments and has beneficial effects on private firm investments by relaxing financing constraints.
Professor(s): Terry Shevlin
Co-author(s): Oktay Urcan and Florin Vasvari
Accepted at: Journal of the American Taxation Association
We use path analysis to investigate how corporate tax avoidance is priced in bond yields and bank loan spreads. We find that approximately one half of the total effect of tax avoidance on bond yields is explained through the negative effect of tax avoidance on future pre-tax cash flow levels and volatility and, to a lesser extent, lower information quality. The effects of these mediating variables are much less pronounced for bank loan spreads. The results of additional cross-sectional analyses indicate that, relative to bond investors, banks are able to reduce information asymmetry problems more effectively, given their access to firms’ private information and greater ability to monitor borrowers.
Professor(s): Terry Shevlin
Co-author(s): Novia X. Chen (Merage School PhD alum)
Accepted at: Journal of Accounting and Economics
Harris and O’Brien (2018) investigate whether U.S. tax policy distorts U.S. multinationals’ (MNCs) investment. They find that MNCs facing higher repatriation tax costs engage in fewer domestic acquisitions. The study re-examines the results in two prior studies that found no effect (Hanlon et al. 2015) and a positive effect (Martin et al. 2015) by introducing a new proxy for repatriation tax costs: A binary variable for whether the MNC uses the Double Irish structure. We critique the theory underlying the prediction as well as the proxy. We conclude that caution should be exercised in taking the results at face value.
Professor(s): Terry Shevlin
Co-author(s): Lakshmanan Shivakumar, London Business School, and Oktay Urcan UI-Urbana-Champaign
Accepted at: Journal of Accounting and Economics
Prior studies on the relation between corporate taxes and future macroeconomic growth present contradictory evidence. We argue this mixed evidence is at least partly due to the use of statutory corporate tax rates which ignore the complexity of tax exemptions, tax deductions, tax enforcement and firms’ tax planning. We propose an alternative tax rate measure that aggregates cash effective tax rates of listed firms, which reflect not only statutory tax rates, but also other features of the tax code, enforcement, and firm’s tax planning. We find a strong robust negative relation between country-level effective tax rates and future macroeconomic growth.
Professor(s): Siew Hong Teoh
Co-author(s): Yifan Li (Merage PhD ’17) and Alex Nekrasov (Past Merage Faculty)
Accepted at: Review of Accounting Studies
We define a delayed disclosure ratio (DD) as the fraction of 10-Q financial statement items that are withheld at the earlier quarterly earnings announcement. We find that higher DD firms have a greater delay in investor and analyst response to earnings surprises: (i) the fraction of total market reaction to quarterly earnings news realized around the earnings announcement (after the 10-Q filing) is smaller (greater), and (ii) analysts are more likely to defer issuing forecasts from immediately after the earnings announcement to after the 10-Q filing. Consistent with our limited attention model predictions, the response catch-up associated with DD is incomplete, even after the delayed items are fully disclosed at the 10-Q filing date, and persists until the next earnings announcement date. The return reaction to earnings news over the entire quarter does not vary with DD, so differences in earnings informativeness do not explain the DD effect. Our findings suggest the importance for the timing of disclosures to be coincident with the focal periods—at earnings announcement dates—when investors and analysts are paying the most attention to mitigate limited attention effects.