The purpose of this paper is to empirically test the relationships between corporate earnings and investment. In particular, the study investigates whether knowledge of past investments improves the prediction of future earnings beyond predictions that are based on past earnings alone. Similarly, it investigates whether knowledge of past earnings improves the prediction of future investments beyond knowledge of past investments alone. This is the empirical definition of Granger causality. The empirical results show that the bivariate past series of earnings and investments is superior to the univariate series in predicting future investments but not in predicting future earnings.

The purpose of this paper is to empirically test the relationships between corporate earnings and investment. In particular, the study investigates whether knowledge of past investments improves the prediction of future earnings beyond predictions that are based on past earnings alone. Similarly, it investigates whether knowledge of past earnings improves the prediction of future investments beyond knowledge of past investments alone. This is the empirical definition of Granger causality. The empirical results show that the bivariate past series of earnings and investments is superior to the univariate series in predicting future investments but not in predicting future earnings.

Applying Fishburn's [4] conditions for convex stochastic dominance, exact linear programming algorithms are proposed and implemented for assigning discrete return distributions into the first‐ and second‐order stochastic dominance optimal sets. For third‐order stochastic dominance, a superconvex stochastic dominance approach is defined which allows classification of choice elements into superdominated, mixed, and superoptimal sets. For a choice set of 896 security returns treated previously in the literature, 454, 25, and 13 distributions are in the first‐, second‐, and third‐order convex stochastic dominance optimal sets, respectively. These optimal sets compare with admissible first‐, second‐, and third‐order stochastic dominance sets of 682, 35, and 19 distributions, respectively. The applicability of superconvex stochastic dominance for continuous distributions defined over a bounded interval is then shown. The difficulties in identifying the elements of the superdominated set for distributions defined over the entire real line are demonstrated in the determination of the dominated choices for a set of normally distributed mutual fund returns previously examined by Meyer [9]. Specifically, we find that the dominated set determined by Meyer is too large.

New Intro, Seth Klarman New Intro, Jim Grant New Intro to Part 1, by Roger Lowenstein Part 1, Survey & Approach New Intro to Part 2, By Howard Marks Part 2, Fixed Value Investments New Intro to Part 3, By Ezra Merkin Part 3, Securities with Speculative Features New Intro to Part 4, By Bruce Berkowitz Part 4, Common Stocks New Intro to Part 5, By Glenn Greenberg Part 5, Analysis of the Income Account New Intro to Part 6, By Bruce Greenwald Part 6, Balance Sheet Analysis New Intro to Part 7, By David Abrams Part 7, Additional Aspects of Security Analysis

Do commercial property taxes affect business microlocation decisions? Using precise geolocations for 2.8 million U.S. establishments, we employ a spatial discontinuity density design, comparing for-profit establishments to nonprofits, which are generally exempt from property taxes. Relative to nonprofit establishments, for-profit establishments disproportionately locate on the low-tax side of county borders. This effect strengthens with the size of the tax differential. At borders with differentials in the top decile (quartile), we estimate a 6–7 (5–6) percent shift in establishment location toward the low-tax side over a 10-km band. Businesses move from as far as 10 km away on the high-tax side but concentrate within 1 km on the low-tax side. Firms trade off tax savings with customer access: low-foot-traffic establishments respond more to tax differentials than high-foot-traffic ones. A survey of U.S. mayors finds that perceptions of property taxes’ importance for business location rise with cross-border tax differentials. Data Availability: Survey data are available upon request. All other data were obtained from publicly and commercially available sources described in the manuscript.

Theory suggests that changes in corporate tax rates can alter the dispersion of after-tax project payoffs, thereby altering the exposure of firm-level risk transmitted to executives through compensation. Using state tax changes, we observe firms shifting away from option-based compensation following state corporate tax rate increases. This result is concentrated in compensation contracts that lack relative performance evaluation (RPE) features, which filter common shocks to performance and influence the type of risk executives are incentivized to take. We also find that firms are more likely to initiate RPE shortly after a state tax rate increase and that firms that adjusted compensation through reductions in equity risk incentives or used RPE were less likely to experience a subsequent increase in systematic risk following a state tax rate increase. Overall, our findings provide novel insight into how taxes can influence CEO compensation design and the transmission of firm-level risk to executives. Data Availability: Data are obtained from public sources identified in the paper.

Guided by the performance feedback literature, we study PCAOB inspections as a nonstandard feedback event. We use an experiential questionnaire to collect and analyze perceptions, reactions, and responses to inspection feedback from 120 partners and managers subject to a recent PCAOB inspection. Despite varying perceptions, we find on average auditors perceive strong firm support but also that firms acquiesce to inspectors. Generally, the feedback source, inspectors, are perceived as professional, organized, and knowledgeable and auditors agree with the feedback message, perceiving it as consistent and well reasoned. We observe a range of auditor reactions (satisfaction with and motivated to use inspection feedback), responses at the engagement level (improvements to audit quality and inspection risk or impression management), and individual responses. Multivariate analyses show more positive feedback perceptions improve reactions, which enhance desirability of responses and are robust to considering the inspection outcome, offering insights for refining inspection interactions and processes.

Although q2 measures how well a pattern of means fits a custom contrast, there is no guidance for what values are “good.” We survey experimental accounting researchers who assess the fit between plots of means and contrast weights as poor, acceptable, good, or excellent. We find that graphical presentation effects and researchers’ individual attributes influence their assessments. This suggests that research needs an ex ante method for evaluating q2, grounded empirically in the wisdom of the crowd across many different presentations, rather than relying solely on the idiosyncratic assessments of individual researchers. Using fuzzy set theory, we develop such a method that researchers can use to characterize q2 = 0.100, for example, as mostly good fit, leaning toward acceptable. Our approach has significant advantages over bright-line cutoffs commonly used for other statistical indices. Overall, our study can improve our discipline’s assessments of fit between experimental results and custom contrast weights. Data Availability: Data are available from the authors upon request.

The negative effects of common ownership on competition have received significant attention, but many proposed mechanisms for institutional investor influence seem implausible. We develop and test an analytical model of optimal compensation in an oligopoly with common ownership, focusing on revenue-based pay as a plausible channel through which institutional investors might influence competition. Our model implies a negative effect of common ownership on firms’ use of revenue-based pay. Using both associative analyses and an event study difference-in-differences design based on plausibly exogenous institutional mergers, we find no evidence of a negative relation between common ownership and the use of revenue-based pay, except in an economically small subsample of extremely concentrated owners. Results involving relative performance incentives are similar. Collectively, our results provide no support for the notion that cross-owning blockholders in general influence compensation contracts in order to soften executives’ incentives to compete aggressively. Data Availability: Data are available from the public sources cited in the text.

We examine how disclosure and manager reputation influence capital raised when there is no commercial substance underlying the investment. Special Purpose Acquisition Companies (SPACs or “blank check” companies) do not have operations or substantive assets at the IPO but promise to use the funds raised to acquire a private firm, generally within two years. Given the lack of commercial substance and historically poor ex post performance, it is unclear what SPACs disclose at the IPO and why investors invest. Although disclosure is important in traditional IPOs, the underlying information available differs for SPACs. Nonetheless, our evidence suggests disclosures are useful to SPAC investors, although differently than for traditional IPO investors. We also examine manager reputation and find prior SPAC or CEO experience and celebrity status are associated with funds raised. Even when an investment lacks commercial substance, disclosure and reputation are important for investing decisions. Data Availability: Data are available from the public sources cited in the text.