Knowledge that Transforms

Do industries use advertising strategically when subject to the threat of political costs? Communication via advertising can assuage public concerns, which, in turn, reduces the incentives for elected officials to impose regulations on the industry. We identify expected political costs using cases of repeated industry testimony at congressional hearings. To disentangle strategic advertising in response to the threat of political costs from advertising for other reasons (e.g., reputation building or to generate sales), we exploit the fact that only politicians overseeing industry-relevant hearings can impose costs on a given industry. We find that subsequent to these hearings, affected industries increase their advertising by 132% more in the electorates of the politicians overseeing the hearings, relative to the increase in the electorates of other politicians. The strategic increase in advertising is magnified in the electorates served by the most senior politicians on the committees and those with the most politically engaged citizens. The increase is also pronounced in election years, when the hearings are longer, contain more negative language, or include a higher proportion of legislation-related words. Moreover, our results are not driven by politicians’ decisions to serve on committees relevant to their local-area firms. In sum, our findings provide novel evidence about corporate communication with non-investor stakeholders.

This paper examines the function of accruals in measuring quarterly firm performance. We show that operating accruals play a pronounced role in offsetting quarterly cash flow fluctuations and that this timing role is much stronger than concluded based on annual measurements in the recent literature. A fundamental driver of this timing role of accruals is the significant seasonal variation in operating cash flows, which is determined by the interaction between sales seasonality and working capital policies. We further find that the seasonality in cash flows and the offsetting role of accruals have declined over time. We link this trend to international diversification, trends in the importance and seasonality of retail sales, zero-inventory firms, market power, and the rise in supply chain finance.

We provide evidence on the role of perceived fairness in tax compliance. Are households more willing to pay taxes when they believe others contribute their fair share? We investigate this question with a natural field experiment in the context of U.S. property taxes. Using an information-disclosure experiment, we exogenously shifted households’ perceptions of the average tax rate paid by others. We find that higher perceived average tax rates increase perceptions of fairness and reduce the likelihood of tax appeals. Quantifying the effect, for every additional $1 paid by the average household, a taxpayer is willing to contribute $0.43 more. In the field experiment, subjects were informed about the average tax rate but not why it might differ from theirs. A complementary survey shows this context matters: when households learn others pay lower rates due to exemptions such as disability or advanced age, they are more willing to tolerate unequal rates.