Knowledge that Transforms

We study whether, and more importantly, through what mechanisms, quasi-indexers affect portfolio firms’ tax planning by employing the discontinuity in quasi-indexer ownership around the Russell 1000/2000 index cutoff. Using a regression discontinuity design, we find that higher quasi-indexer ownership leads to greater tax saving. With respect to the mechanisms, we find that the greater tax saving is a result of a focus on improved overall firm performance, not a specific focus on improved tax planning. We further find that the documented tax saving effect is partially due to quasi-indexers’ influences on executive equity incentives, corporate governance, and information environment.

We explore how an accounting measure of information asymmetry between lead and participating lenders influences syndication structures by examining whether lead lenders’ commercial and industrial (C&I) loan-loss provision validity affects the fraction of loans they retain. We first conduct multiple tests showing that C&I provision validity reflects banks’ underlying screening and monitoring effectiveness. We then find lead lenders’ loan share decreases with C&I provision validity, but not with non-C&I provision validity. Consistent with an information effect, we further find this association is attenuated by (i) alternative information sources about the borrowers and (ii) previous lead/participant relationships and participant/borrower relationships.

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 firms' tax planning. We find a strong robust negative relation between country-level effective tax rates and future macroeconomic growth.

Using the equity market liberalization of 23 emerging market countries between 1996 and 2006, we examine how the degree of competition for a firm's shares affects the price of information asymmetry. We find evidence of a significant decline in the pricing of information asymmetry as countries remove regulatory restrictions on foreign ownership. Our study provides novel evidence on the link between the degree of competitiveness of equity markets and the price of information asymmetry. The work also furthers our understanding of the economic consequences of foreign stock ownership.

We experimentally investigate how jargon affects investment willingness for investors with different industry knowledge, and whether such effects vary with good or bad jargon. We find that for investors without industry knowledge, jargon decreases investment willingness because it decreases understanding. However, for investors with some but low industry knowledge, jargon increases investment willingness because it increases perceived product premium. Such effects exist whether good or bad jargon is used. Finally, investors with high industry knowledge differentiate between good and bad jargon, and reduce investment willingness only when bad jargon is used. These findings have implications for regulators, managers, and investors.

This paper examines whether common ownership – i.e., instances where investors simultaneously own significant stakes in competing firms – affects voluntary disclosure. We argue that common ownership (i) reduces proprietary cost concerns of disclosure, and (ii) incentivizes firms to “internalize” the externality benefits of their disclosure for co-owned peer firms. Accordingly, we find a positive relation between common ownership and disclosure. Evidence from cross-sectional tests and a quasi-natural experiment based on financial institution mergers help mitigate concerns that our results are explained by an omitted variable bias or reverse causality. Finally, we find that common ownership is associated with increased market liquidity.

This paper studies managers’ use of accounting discretion to deter entry. Using state-level changes in branching regulation under the Interstate Banking and Branching Efficiency Act, I find geographically-constrained community banks increased their loan loss provisions to appear less profitable when faced with the threat of entry by competitors. Additional tests rule out alternative explanations that firm economics or regulators drove the increase. I complement my analyses with survey-based evidence. Findings from the survey confirm that banks prefer to locate in markets where incumbents have high profitability and low credit losses, and that banks use competitors’ financial statements to analyze competition.

We examine the relation between firms' voluntary guidance and mandatory 8K filings. We find a negative relation between guidance and 8Ks, which strengthens following the 2004 expansion of mandatory 8K requirements, consistent with firms using the disclosures as substitutes. Increases in 8Ks coincide with declines in firms’ profits, but this negative relation weakens after the 2004 regulation, consistent with firms broadening the scope of information conveyed through 8Ks. Together, our findings suggest firms became more reliant on 8Ks to convey general types of information after the 2004 regulation, rather than primarily negative news, which reduces their incentives to issue guidance.

We find that forecast revisions by analysts with more favorable surnames elicit stronger market reactions. The effect is stronger among firms with lower institutional ownership and for analysts with non-American first names. Following the 9/11 terrorist attacks, and France and Germany's opposition to the Iraq War, revisions by analysts with Middle Eastern and French or German surnames, respectively, generated weaker market reaction. Surname favorability is not associated with forecast quality, but it has complementary effects with forecast performance on analysts’ career outcomes. Surname favorability mitigates under-reaction to forecast revisions. These findings are distinct from the effects of ethnic, cultural proximity, or in-group bias.