Knowledge that Transforms

Internal and external parties meaningfully shape corporate tax outcomes. However, we lack a holistic understanding of the major parties involved and their comparative effects. Using proprietary IRS data for public and private firms, we identify the top executives, corporate accountants, external accounting firms, and individual tax preparers and examine the comparative importance of these parties on corporate tax outcomes. We find that external individual tax preparers matter much more than the accounting firms that employ them. Internal actors (top accountants and executives) explain more of the variation in corporate tax outcomes than external actors (individual tax preparers and accounting firms). We also find some evidence that individuals’ characteristics are associated with the tax behavior of the corporations they serve. Overall, we conclude that some of the actors who are unobservable in public data play a greater role in corporate tax outcomes than parties that are a focus of prior research.

This study empirically examines whether firms reclassify related-party payments to avoid the base erosion and anti-abuse tax (BEAT) of the Tax Cuts and Jobs Act (TCJA). We leverage the BEAT filing threshold and use both a difference-in-differences design among U.S. firms and a triple-difference design utilizing the parent company's location to provide evidence that firms reclassify related-party payments to avoid the BEAT. This effect is stronger in firms with greater pre-TCJA income shifting incentives. We estimate a $6 billion aggregate reduction in U.S. taxes for our sample firms in 2018. We also examine the consequences of reclassifying related-party payments and find some evidence of an increase in tax reserves and a reduction in internal information quality for firms that engage in cost reclassification to avoid the BEAT. These findings help explain observed BEAT collection shortfalls, contribute to the current policy debate about international tax reform, and document spillover effects of tax policy.

This study examines whether recent mergers between small and midsize accounting firms influence competition by increasing the number of firms that can compete with larger rivals in the U.S. public company audit market. I find that in-market mergers generate efficiencies that are reflected in a post-merger reduction in audit hours but not in reduced audit quality. For both in-market and out-of-market mergers, clients switching to post-merger firms are more likely to be accelerated filers and are significantly larger in terms of several proxies for size and complexity. Lastly, I find that an increase in market-level merger activity is associated with lower profitability of Big 4 firms operating in the same market but only in the smaller client segment. These findings suggest that recent mergers have actually increased competition in some segments of the audit market despite already high concentration and concerns about a lack of sufficient competition.

We examine employee responses to CEO activism, the increasingly common practice of CEOs taking public stances on socio-political issues. CEO activism may bolster employees' identification with their organizations and strengthen shared beliefs among employees. Alternatively, CEO activism may alienate employees if CEO stances contrast with employees' ideologies. We find that employee satisfaction is higher when CEOs engage in activism that is aligned with employees’ ideologies. Furthermore, firms with CEO activism experience a net inflow of productive, ideologically-aligned inventors, which contributes to increased firm-level innovation. The improvements in employee satisfaction and innovation constitute an important channel that connects aligned CEO activism to increased firm value.

Advertising is a critical competitive tool that shapes interactions among firms in the product market. Using third-party tracked data on advertising outlet costs, I find that a nontrivial portion of public firms, even those with intense advertising activities, do not disclose advertising expenses in their financial statements, indicating significant disclosure discretion. I further use product category-level advertising data to develop a firm-specific measure of advertising rivalry. I predict and find that advertising rivalry is negatively associated with the likelihood of disclosing advertising expenses. This negative association is more pronounced when firms advertise on less trackable media outlets or have more mature products. These findings suggest that firms consider their advertising expenses proprietary and that concerns about advertising competition discourage the disclosure of advertising expenses.

This study presents a model in which behavioral investors shape their current expectations based on statistical analysis of historical non-disclosure events. Investors may hold overly optimistic expectations following a non-disclosure event, thereby disrupting unraveling toward forthcoming disclosures. While a regulator can mandate disclosure, this protective intervention has its drawbacks. Overprotection prevents investors from learning from losses and leads to cycles of high compliance followed by high mispricing when innovations in transactions render current regulations ineffective. An unregulated market, on the other hand, tends toward high transparency over time. The model further explains negative market reactions to regulation, an association between price drift and transparency, reversals in market confidence, and that regulators should favor laissez-faire in times of investor pessimism. Further implications are explored for regulations that facilitate learning and prevent cycles.

Prior research finds that auditors' social connections with their clients harms audit quality. We examine auditors' social connections with members of their clients' business community, a setting in which auditors' connections may improve audit quality. While social ties within a client's business community should improve auditor competency, they also threaten auditor independence. We test the effects of auditors' network connections on audit quality using data from China, where data on social connections and individual auditors are available. Auditors' business connections should be particularly beneficial in a relational economy like China, where clients heavily rely on social networks for contracting. We find that auditors with strong local business and government connections deliver higher quality audits as evidenced by fewer financial irregularities among their clients. Our findings are consistent with the improved competency that arises from auditors' business connections outweighing the potential costs of impaired auditor independence.

Guidance is an important and long-studied topic in the accounting literature. Call, Hribar, Skinner, and Volant (this issue) survey managers who provide guidance and those that do not to generate insights on the costs and benefits of providing guidance. For managers who do provide guidance, perceptions regarding guidance characteristics are elicited. Firm responses are connected to archival data sources, enabling cross-sectional analysis of survey responses and facilitating comparison of self-reported guidance with common guidance proxies in the archival literature. I discuss key insights from the survey, considering the limitations inherent in the survey method. I also clarify what is meant by the term guidance, how it differs from other forward-looking information and how researchers operationalize the guidance construct. I conclude by offering six research questions for future consideration based on the survey evidence.

When firms are forced to publicly disclose financial information, credit rating agencies are generally expected to improve their risk assessments. Theory predicts such an information quality effect but also suggests an adverse reputational concerns effect since credit analysts may become increasingly concerned about alleged rating failures. We empirically examine these predictions using a large-scale quasi-natural experiment in Germany, where a new compliance regime required firms to disclose annual financial statements publicly. Consistent with the reputational concerns hypothesis, we find an average increase in credit rating downgrades that is entirely driven by changes in the discretionary assessments of credit analysts rather than changes in firm fundamentals. Following public disclosure regulations, analysts tend to give positive private information less weight in their risk assessments while assigning greater weight to negative public information. A final set of results indicates that professional credit providers recognize that the resulting downgrades are not warranted.

Prior literature shows decision fatigue reduces analysts' forecast accuracy. We study whether analysts strategically manage their decision fatigue. Firms within an analyst's research portfolio can differentially affect the analyst's reputation and career, with larger firms with greater trading volumes and institutional ownership being more important. We find that analysts choose to issue forecasts for more important firms when they are less decision fatigued, i.e., when the number of prior forecasts the analyst has issued in the day is lower. Young analysts, analysts in low-status brokerage houses, and analysts who become decision fatigued more easily manage fatigue more, and analysts experience more favorable career outcomes after strategically managing fatigue. Finally, fatigued analysts differentiate between more important and other firms in herding and self-herding.