We examine the economic determinants of short-sale supply, and its consequences for future stock returns. Lendable supply increases with expected borrowing costs and decreases with financial statement constructs that indicate overvaluation. Although rising loan fees help ease supply constraints, we find shares are still least available when they are most attractive to short sellers. Using a number of firm characteristics, we derive useful instruments for real-time loan supply and demand conditions in the lending market. Further, we show that (1) when lendable supply is binding (non-binding), short-sale supply (demand) is the main predictor of future stock returns, (2) abnormal returns to the short-side of nine well-known market anomalies are attributable solely to “special” stocks, and (3) loan fees significantly reduce the profitability of the short side and several of these anomalies cease to be profitable. Overall our evidence highlights the central role played by the supply of lendable shares in equity price formation and returns prediction.

Recent research shows that high return dispersion (RD) is associated with economic conditions characterized by high discount rates, which are not conducive to growth and investment. We propose that RD risk can explain the accrual and investment anomalies. We conduct asset-pricing tests that include RD as a potential risk factor and show that low-accrual and low-investment firms have significantly higher exposure to the risk captured by RD. RD significantly explains future returns and the excess returns to accrual and investment hedge portfolios shrink in magnitude and become insignificant during periods of low RD. We conclude that risk explains the accrual and investment anomalies.

We examine whether more sophisticated accounting methods (in the form of accrual accounting) interact with other information sources to reduce information asymmetries between small business borrowers and lenders, thereby lowering borrowers׳ probability of loan denial and cost of debt. We find that higher third party credit scores, but not the use of accrual accounting, decrease the likelihood of loan denial. However, firms using accrual accounting exhibit statistically lower interest rates after controlling for many factors associated with the cost of debt. Further, the interest rate benefits from accrual accounting are greatest when the borrower׳s credit score is low and/or the length of its banking relationship with the lender is short. This evidence indicates that accrual accounting can benefit small business borrowers, but that the information contained in third-party credit scores and obtained through ongoing banking relationships can substitute for the incremental information provided by accrual accounting.

We examine the link between corporate governance, managerial incentives, and corporate tax avoidance. Similar to other investment opportunities that involve risky expected cash flows, unresolved agency problems may lead managers to engage in more or less corporate tax avoidance than shareholders would otherwise prefer. Consistent with the mixed results reported in prior studies, we find no relation between various corporate governance mechanisms and tax avoidance at the conditional mean and median of the tax avoidance distribution. However, using quantile regression, we find a positive relation between board independence and financial sophistication for low levels of tax avoidance, but a negative relation for high levels of tax avoidance. These results indicate that these governance attributes have a stronger relation with more extreme levels of tax avoidance, which are more likely to be symptomatic of over- and under-investment by managers.

We examine the global equity supply chains of U.S. multinationals to explore how tax and nontax country characteristics affect whether firms use foreign holding companies and where they locate them. We find that U.S. multinationals supply equity from headquarters to their foreign operating companies through foreign holding companies located in countries that lightly tax equity distributions. We also find that foreign holding companies tend to be located in countries with less corruption and investment risk than the countries in which the operating companies they own are located. In addition, we provide empirical evidence that the Netherlands, a well-known location for international tax planning, is a particularly popular site for foreign equity holding companies. Our findings contribute to a nascent literature that examines ownership chains in multinational companies and a larger literature on subsidiary location decisions for multinationals. The findings also provide empirical evidence that could be useful to governments in developed countries as they attempt to reform international tax policy.