Knowledge that Transforms

In 2012, Congress passed Moving Ahead for Progress in the 21st Century (MAP-21), which changed the ERISA pension funding rules such that mandatory pension contributions decreased. Advocates for the bill argued that reducing mandatory contributions would increase firms' investment. In contrast, I do not find an average increase in investment among the firms benefiting from MAP-21. Rather, I find that firms either hold pension funding relief on their balance sheets as liquid assets or pay out pension funding relief to shareholders. To the extent that managers increase investment in response to MAP-21, it is concentrated in firms with weak governance or ineffective internal controls.

Using a dataset of 3,234 letters sent by 434 hedge funds to their investors during 1995–2011, we study what motivates hedge fund managers to make voluntary disclosures. Contrary to the hedge fund industry's reputation for opacity, we observe that managers provide their investors with an array of quantitative and qualitative information about fund returns, risk exposures, holdings, benchmarks, performance attribution, and future prospects. We find that the tensions between the agency costs faced by investors and the proprietary costs faced by managers affect fund disclosures. Consistent with managers reducing proprietary costs, better-performing funds disclose less quantitative data about performance and holdings, and consistent with the presence of agency costs, riskier funds disclose less quantitative information about performance and assets under management.

A growing literature examines how a firm's behavior impacts the behavior of its peers. In this paper, we examine how changes in tax paying, and the associated financial reporting, impact a firm's peers. Changes to tax paying and reporting behavior at other firms within a peer group can be affected by many of the same factors, such as industry-level tax policy changes or audit risk, so we make use of exogenous—to the peer firms—shocks to tax behavior. Following the methodology of Dyreng, Hanlon, and Maydew (2010), we estimate managerial tax avoidance fixed effects and use these to identify tax rate shocks associated with executive turnover. We find that peer firms respond to these shocks by changing their GAAP tax rates in the same direction. The magnitude of the effect corresponds to an approximately 10 percent response to the average change in peer group GAAP ETR. Our evidence suggests that these peer effects occur only for book (i.e., financial reporting), rather than cash (i.e., real effects), ETR and are concentrated in firms with potentially greater discretion in reporting taxes on foreign earnings. JEL Classifications: H25; M41. Data Availability: Data used in this study are available from public sources identified in the paper.

We find that economic conditions at the time an auditor enters the labor market have a long-term impact on her judgment and decision making. Specifically, engagement partners who started their career during economic downturns issue audit adjustments more frequently. For the subsample of company-years with no audit adjustments, downturn auditors are more likely to issue a modified audit opinion. In addition, companies audited by downturn auditors are less likely to violate financial reporting and disclosure regulations. Together, our findings suggest that the early career stage is a critical formative period for auditors.

This study investigates the determinants of goodwill impairment decisions by firms applying IFRS based on a comprehensive sample of stock-listed firms from 21 countries. Multivariate logistical regression findings indicate that goodwill impairment incidence is negatively associated with economic performance, but also related to proxies for managerial and firm-level incentives. In addition, whereas goodwill impairment tends to be timely for firms in high enforcement countries, firms in low enforcement countries tend to be less responsive to declines in the economic value of goodwill; CEO compensation concerns affect the impairment decision for firms in low enforcement; and CEO reputation concerns and management preference for smooth earnings influence goodwill impairment decisions in high, as well as low, enforcement countries. We also find that private monitoring through institutional investors substitutes for public enforcement in the context of goodwill impairment when a country's enforcement regime is relatively weak.

Limited attention theory predicts that higher salience of earnings news implies a stronger immediate market reaction to earnings news and a weaker post-earnings announcement drift (PEAD) or reversal (PEAR). Using a new measure, SALIENCE, defined as the number of quantitative items in an earnings press release headline, we find strong evidence consistent with salience effects. Higher SALIENCE is associated with stronger announcement reaction and subsequent PEAR. Managers are more likely to choose higher SALIENCE before selling shares in the post-announcement period and when earnings are high, but less persistent, and to choose lower SALIENCE before stock option grants. The results are robust to using residual salience and an extended set of control variables. The findings are consistent with managers opportunistically headlining positive financial information in the earnings press release to incite over-optimism in investors with limited attention.

Recent research reveals that accruals-based earnings management (AEM) is decreasing while real earnings management (REM) is increasing, suggesting the correlation is due to regulatory scrutiny. However, based on Correspondent Inference Theory, we predict and find that when management uses REM, auditors are more restrictive of management's subjective estimates, making it more difficult for management to use income-increasing AEM. Our experiment manipulates the presence versus absence of REM, and whether the audit difference potentially impacts the client's ability to meet an earnings target. Using a serial mediation model, we find that when auditors observe REM, they perceive these operating decisions as aggressive, leading them to perceive management as aggressive, ultimately causing greater proposed adjustments on an unrelated audit difference. We contribute to the literature by demonstrating that when auditors observe REM, their altered perceptions about management can cascade, affecting how they respond to management estimates in unrelated financial statement accounts.

This paper investigates the effect of internal information asymmetry (IIA) within conglomerate firms on the quality of management forecasts and financial statements. We develop a novel measure to capture IIA between divisional managers and top corporate managers, computed as the difference in their respective trading profits on their own company's stock (DIFRET). Numerous validation tests indicate that DIFRET indeed captures the information asymmetry between divisional managers and top managers. In our primary tests, we find that DIFRET is associated negatively with the accuracy, bias, specificity, and frequency of management forecasts. Furthermore, the likelihood of error-driven accounting restatements increases with DIFRET. Our results, thus, suggest that external communication quality suffers when the information asymmetry between divisional managers and top managers is more severe.

This paper examines if, when, and to what extent multinational tax incentives incrementally explain where firms move offshored U.S. jobs. Using jobs data from a Department of Labor program called Trade Adjustment Assistance, I find a significant association between tax incentives and both the likelihood that a foreign country hosts offshored U.S. jobs and the number of U.S. jobs it hosts. This association is stronger when managers have discretion to coordinate cross-border transactions internally and when they do not face political costs imposed by labor unions. Following instances of offshoring, I find some evidence that offshoring firms have lower effective tax rates, but these reductions are concentrated within larger layoffs in which jobs are sent to low-tax countries. These findings are relevant to understanding the real effects and welfare consequences of incentives created by current U.S. tax policy.

We examine the impact of Seasonal Affective Disorder (SAD) on financial analysts. We hypothesize and find that analysts are more pessimistic, less precise, and more asymmetric in their boldness in the fall, as indicated by their forecasts of quarterly earnings. The effects are apparent in all forecast horizons analyzed and robust across multiple specifications. Importantly, pessimism in fall forecast revisions shows analyst-specific persistence, providing a strong indication that the effect is a result of SAD rather than other coincident factors. We also find evidence of a reversal in pessimism in the spring. Additional analyses show that analyst forecasts exhibit less seasonality than equity returns, and that the presence of analyst forecasts in the fall is associated with attenuation in the seasonal pattern in stock returns. Overall, the evidence suggests that SAD affects both financial analysts and equity investors, but the effect on the latter is stronger. JEL Classifications: G11; G12; G14; G41; M41. Data Availability: Data are available from public sources cited in the text.