Knowledge that Transforms

This paper studies effects of the five-year net operating loss carryback enacted near the ends of the 2001 and 2007–2009 U.S. recessions—a policy that gave firms larger U.S. federal tax refunds as a fiscal stimulus measure. Following the end of the 2001 recession, I find that the policy had little effect on firm financial conditions, and I find that firms allocated $0.40 of every refund dollar to investment in that period. In contrast, the policy improved firm financial conditions following the 2007–2009 recession, reducing bankruptcy risk and the probability of future credit-rating downgrades. In this period, I find that firms initially used the refunds to increase cash holdings before paying down debt in the following year. These results highlight the importance of considering macroeconomic conditions when studying firm uses of tax-related cash flow and the related effects on firm financial health.

I examine the relation between borrowers' financial reporting (FR) and the quality of banks' loan portfolios. This relation is theoretically ambiguous as better FR not only improves banks' monitoring of loans, but also grants more creditworthy borrowers cheaper access to alternative public funding, increasing competition and creating adverse selection problems for banks. Using the adoption of Sarbanes-Oxley Act Section 404 to identify improvements in borrowers' FR, I find an overall positive effect of FR on banks' lending: the quality of loans extended to borrowers subject to Section 404 improves relative to the quality of loans extended by the same bank to other borrowers exempted from Section 404. Additional tests examining borrowers' internal control over FR and loan contracts' characteristics confirm that improved monitoring and screening are both responsible for the higher loan portfolio quality. Overall, my study highlights unexplored consequences of companies' FR on the quality of banks' assets. Data Availability: Untabulated results and analyses mentioned in the article are available as an Online Appendix, see the link in Appendix E.

To address the empirical phenomenon that organizations often reward time on the job as an end in itself, we design an experiment in which participants solve anagram puzzles, manipulating whether a compensation pool generated from the output of paired workers is allocated based on the individual inputs of relative time spent or on the individual outputs of puzzles solved. Relative to an output-based allocation, we find that an input-based allocation leads participants to spend more time on the task. However, when paired participants have widely different abilities, an input-based allocation also leads to less effort intensity, defined as puzzles solved per unit of time spent. We attribute these findings to fairness considerations, an interpretation we corroborate in a second experiment with purely individual incentives that finds the same effort duration advantage of input-based pay, but no offsetting disadvantage in effort intensity.

We present 179 investment professionals with a scenario that manipulates whether a male or female analyst persists in pitching a stock pick after it has been voted down. Respondents evaluate analysts as less promotable when they do not persist, but only if the analyst is female. Results are consistent with categorization theory, which suggests that evaluators rely on stereotypes to interpret unexpected behaviors. In male-dominated settings, the same unexpected behavior may be perceived as evidence of a “lack of fit” in evaluations of women, but nondiagnostic in evaluations of men. Analysis of free-response questions confirm that the unexpected behavior was a predominant focus in performance evaluations of women, but not for men. Semi-structured interviews with 13 senior investment professionals provide additional support for the role of expectations and categorization heuristics on promotion decisions. Our findings shed light on factors that may contribute to the investment industry's “leaky pipeline” for women. JEL Classifications: M40; M41; M49; M51. Data Availability: Contact the authors.

We document potential cross-sectional differences in how expected loss accounting will affect provision timeliness to provide important policy insights and contribute to the literature regarding the estimation of the expected loss model adoption impact and provision timeliness determinants. Our findings that analyst provision forecasts incrementally predict future nonperforming loans (NPLs) and market returns suggest that the incurred loss provision does not incorporate all available future loss information. Higher incremental coefficients on provision forecasts for banks with greater unrecognized future losses and incurred loss constraints suggest CECL could affect cross-sectional provision timeliness differences by removing these constraints. Specifically, the provision forecast and future NPL association increases with banks' unconstrained future loss estimates reflected in loan fair value disclosures and incurred loss constraints indicated by heterogeneous loans individually reviewed for impairment. This association also increases with EPS forecast errors, but decreases with target price and NPL forecast errors.

This research examines spillover effects of tax avoidance on peers' firm value using the setting of the European Commission's state aid investigations of private letter rulings. We assume that news about a firm's tax avoidance strategies also reveals information about peers' tax avoidance because investors expect similar firms to use similar strategies. Based on an event study design, we show that news about potential costs of tax avoidance of targeted U.S. multinational firms leads to negative stock price reactions among their peers. Moreover, peers' investors adjust their evaluations upward for news in favor of the targeted firms. Consistent with the level of tax avoidance being indicative of having similar strategies, spillover effects are stronger for firms with the highest levels of tax avoidance when examining a broad set of peers. Our findings suggest the need for a more comprehensive understanding of the costs and benefits of tax avoidance. Data Availability: Data are available from the public sources cited in the text.

This paper studies the financial consequences of a reported data breach for bank loan terms. Using a staggered difference-in-differences approach with treatment and control samples matched by data breach propensity, we find that firms that have reported data breaches face higher loan spreads and their loans are more likely to require collateral and demand more covenants. The effects are more pronounced when the data breach involves criminal activities or the loss of a large number of records, or when the breached firm belongs to certain industries or has a high IT reputation. Moreover, using the introduction of state mandatory data breach notification laws as an exogenous shock, we find that the negative effect of data breaches on bank loan terms is more significant after these laws took effect. Our evidence also suggests that breached firms that take more remedial actions following the breach incident receive less unfavorable loan terms.