Abstract We investigate the impact of firm‐level political risk on loan contracting. We find that firm‐level political risk is positively associated with bank loan cost and that this effect is stronger for firms experiencing increased operational uncertainty and higher default risks. Firm‐level political risk also leads to more unfavorable non‐pricing loan terms. To alleviate endogeneity concerns, we use an instrumental variable approach and placebo tests. We further find that political connections and relationship‐based borrowing can attenuate the adverse effect of firm‐level political risk on loan contracting.

ABSTRACT Does personal litigation risk for independent directors materially affect firm valuation, compensation‐related issues for independent directors, and board composition decisions? We use the unexpected In re Investors Bancorp decision in 2017 by the Delaware Supreme Court, which lowered the liability threshold only for directors in derivative litigation over their own equity grants and increased their future litigation risk, to examine these issues. Understanding changes in independent director litigation risk is important because such changes may affect directors' willingness or ability to serve on boards and advise executives. Consistent with our predictions, investors and firms reacted to the decision. First, Delaware firms experienced significant negative short‐window returns, concentrated in high‐litigation‐risk firms where equity compensation is most important. Second, Delaware firms responded by increasing the use of director compensation caps, highlighting that they did not pay excessive amounts. Third, Delaware firms with higher abnormal director compensation decreased director compensation, while those with lower abnormal director compensation did not. Finally, Delaware firms added higher‐quality directors to the compensation committee, consistent with concerns about heightened litigation risk for those positions. Notably, these new, higher‐quality directors did not accept lower pay, unlike holdover directors who previously served on the committee. Overall, results are consistent with director litigation concerns having a significant effect on shareholder value and firm and director behavior.

ABSTRACT Over the past three decades, academic research has sought to understand how cash shortfalls impact a firm's ability to take all available value‐increasing investment projects. We investigate whether firms facing greater financing constraints turn to tax strategies that generate lower cash effective tax rates (ETRs) to mitigate the adverse effect of these financing constraints. We use the Pension Protection Act of 2006 (PPA 2006) as an exogenous shock to financing constraints for pension firms, but not for other firms. Using a difference‐in‐differences research design, we predict and find that pension firms experience a decrease in their cash ETRs by 1.8%–2.4% after the PPA 2006, relative to other firms. These cash tax savings mitigate the investment shortfall brought about by financing constraints by 19%. We also predict and find that the decline in cash ETRs is greater among firms more adversely affected by the PPA 2006. Our paper sheds light on the direction, causality, and economic magnitude of the association between financing constraints and tax planning activities. We also provide insight into the role of tax planning activities within firms' broader corporate business strategies in responding to financing constraints.

Abstract We examine whether firms decrease tax reserves to meet analysts’ quarterly earnings forecasts in the period prior to FIN 48, and whether that behavior changed following FIN 48. We use analysts’ forecasts of pretax and after‐tax income to impute premanaged earnings, or earnings before any tax manipulation. Pre‐ FIN 48, we observe that firms reduce their tax reserves (i.e., increase income) when premanaged earnings are below analysts’ forecasts. Specifically, 78 percent of firm‐quarters that would have missed the analyst forecast if not for the tax reserve decrease, meet that target when the decrease is included. Furthermore, we find a significant positive association between the decrease in tax reserves and the deviation of premanaged earnings from analysts’ forecasts. In contrast, post‐ FIN 48, we find no evidence that firms use changes in tax reserves to manage earnings to meet analysts’ forecasts. Thus, our results suggest that FIN 48 has, at least initially, curtailed firms’ use of tax reserves to manage earnings.

Abstract This study compares auditors' and chief financial officers' pre‐negotiation judgments and considers the potential differential impact the end of the audit (deadline pressure) has on each party. General negotiation literature suggests that individuals change their behaviors as deadline pressure increases (i.e., when there is less time in which to conduct a negotiation) in order to increase the probability of reaching an agreement. In an audit context, the end‐of‐engagement deadline is often based on regulatory filing deadlines (e.g., SEC filings for public companies), which are not determined by either negotiating party. The audit context is also unique in that there are asymmetric consequences for each party (the auditor and client management) for failing to reach an agreement and different negotiation tactics used by the two parties potentially leading to differing levels of concessions. We predict that auditors, who are in a stronger negotiation position, will generally concede less than client management when determining their pre‐negotiation position and will tend to use more contentious strategies. However, such contentious strategies require time. Thus, we expect, based on negotiation theory, that as deadline pressure increases, auditors' concessionary behavior will be more affected than that of client management. Consistent with expectations, results of our experiment suggest that CFOs concede more than auditors in general; however, auditors are more reactive to deadline pressure and increase concessions when faced with high deadline pressure, while CFOs do not. We also measure planned strategy use and find results to be consistent with theory: when deadline pressure is high, auditors are less likely to use contentious tactics, while CFOs' strategy choices are unaffected by deadline pressure. These results suggest that characteristics of the unique auditor–client negotiation environment, such as deadline pressures, have potentially differential effects on both parties due to the differing negotiation strategies employed by these parties.

Abstract Discretionary bonus adjustments allow managers to restore the alignment of employee effort and compensation when bonus amounts are based on noisy objective performance measures. The implications of discretionary adjustments for employees' future efforts and fairness perceptions present important trade‐offs for managers to consider. Adjustments may be used to motivate different types of effort in future periods, but may also create perceptions of unfairness among employees who are not affected by negative events. This study examines the joint influence of the likelihood of future negative uncontrollable events and compensation interdependence (i.e., the extent to which one employee's compensation influences others' compensation) on managers' willingness to make adjustments for the effect of a negative uncontrollable event on a single employee. In our experiment, we manipulate the likelihood of future uncontrollable events and whether bonuses are determined individually or are drawn from a shared bonus pool. Results show that managers are less willing to adjust when the likelihood of future events is high to avoid setting a precedent, thereby motivating employees to adapt to changing conditions. We also find that managers are less willing to adjust, regardless of event likelihood, when compensation interdependence is high, to avoid demotivating unaffected employees. Finally, we find that participants' general attitudes toward compensation significantly influence their adjustment decisions beyond the effects of our independent variables. Our results highlight the unique nature of discretionary adjustments, help explain findings from previous research, and demonstrate important considerations managers must make when using the flexibility provided to them in pay‐for‐performance contracts.

We examine the sophistication of analysts' cash flow forecasts to better understand what accrual adjustments, if any, analysts make when forecasting cash flows. As a preliminary step, we first demonstrate that prior empirical tests used to evaluate the sophistication of analysts' cash flow forecasts are not diagnostic. We then present three sets of evidence to triangulate our conclusion that analysts' cash flow forecasts incorporate meaningful accrual adjustments. First, we review a stratified random sample of 90 analyst reports and find that the majority of these analysts include explicit adjustments for working capital and other accruals in their cash flow forecasts. Second, using a large sample of analysts' cash flow forecasts from 1993–2008, we find that these forecasts outperform time‐series cash flow forecasts in correctly predicting the sign and magnitude of accruals. Finally, we find a significant market reaction to analysts' cash flow forecast revisions, suggesting that investors find these revisions informative. Collectively, our findings demonstrate that analysts' cash flow forecasts are not simply naïve extensions of their own earnings forecasts, but that they reflect meaningful and useful accrual adjustments. These findings are relevant to researchers who examine analysts' cash flow forecasts in a variety of settings, and to investors and practitioners who employ these forecasts for valuation purposes.

Abstract We evaluate and summarize the large body of audit fee research and use meta‐analysis to test the combined effect of the most commonly used independent variables. The perspective provided by the meta‐analysis allows us to reconsider the anomalies, mixed results, and gaps in audit fee research. We find that, although many independent variables have consistent results, several show no clear pattern to the results and others only show significant results in certain periods or particular countries. These variables include a loss by the client and leverage, which have become significant in comparatively recent studies; internal auditing and governance, both of which have mixed results; auditor specialization, regarding which there is still some uncertainty; and the audit opinion, which was a significant variable before 1990 but not in more recent studies.

Abstract Recent literature finds that firms led by female CEOs are more likely to be targeted by activist shareholders and that female CEOs are more likely to cooperate with activist shareholders' requests. Our study complements this literature by using two controlled experiments and a series of semi‐structured interviews with CEOs and CFOs to investigate how a CEO's response to shareholder activism influences investors' reactions and whether these reactions differ depending on the gender of the CEO or on how their response is explained. In the first experiment, we find that investors evaluate a firm as less attractive when a female CEO uses an uncooperative response rather than a cooperative response to shareholder activism, absent any explanation for the CEO's response. Conversely, investors evaluate a firm as less attractive when a male CEO uses a cooperative response rather than an uncooperative response. In the second experiment, where there is an added explanation for the CEO response, we find that investors react more positively to a female CEO's uncooperative response when the explanation is more communal (vs. agentic). Our interviews with CEOs and CFOs provide insights into how the gender of firms' leadership may play a role when activist shareholders target firms. Our results collectively suggest that investors rely on gender stereotypes when evaluating the responses of male and female executives to shareholder activism and that these evaluations affect their investment judgments. Our results also suggest a potential alternative explanation for the finding that female CEOs are more likely to cooperate with activist shareholders than are male CEOs. Rather than inherent differences in the management styles of male and female CEOs, responses to activist shareholders may be driven, at least in part, by managers anticipating that they will be penalized by investors for deviating from gender‐stereotypical behavior.