In the context of the statutory tax rate reductions enacted in the Tax Reform Act of 1986, this paper investigates the degree to which capital market participants anticipate and correctly interpret temporary income effects of tax-motivated income shifting. We find evidence consistent with financial analysts' earnings forecasts failing to anticipate earnings management that shifts income from fourth quarters in higher tax rate years to immediately following first quarters of lower tax rate years. The evidence suggests that this failure is not the result of a decision to ignore the income shifting, but rather an inability to recognize temporary components of reported earnings. We also find evidence that market prices do not fully reflect the temporary income effects of tax-motivated income shifting, and that analyst inefficiency explains about half of the market inefficiency. We interpret these inefficiencies as potentially important costs of tax planning that could limit the ability of public firm managers to implement otherwise optimal tax strategies.

Previous research suggests that certain benefits may derive from the method used to account for business combinations and may affect how bidding firms structure and classify corporate acquisitions. This paper investigates whether benefits derived from accounting method are reflected in bid premia for target firms. Three estimates of bid premia are examined in 95 stock-for-stock acquisitions, 59 accounted for as poolings, and 36 accounted for as purchases. Sampling restrictions, covariance analysis, and a nonparametric matched pair comparison control for potentially confounding variables identified from prior research on bid premia determinants. The results show an association between acquisition accounting method and bid premia for target firms.

Over the last ten years, large corporations, have significantly increased their voluntary disclosures of socially-oriented information in annual reports. External organizations such as the Council on Economic Priorities (CEP) also have been active in producing information bearing on firms' social performances--particularly with respect to pollution control. This study investigates whether security price movements are associated with the release of externally produced information about companies' performances in the pollution-control area--information which has attributes of consistency and comparability not typically found in voluntarily reported, socially-oriented data. Specifically, the study investigates security price movements associated with the release of eight major studies conducted by the CEP of firms' environmental performances in four industries. The observed price movements are consistent with changes in investors' perceptions of the probability distributions of future cash flows of the sample firms at the times of release of the CEP studies. The reported results also are consistent with investors using the information released by the CEP to discriminate between companies with different pollution-control performance records.

This paper decomposes the cash component of earnings and analyzes persistence characteristics and pricing implications of various subcomponents, with particular attention to changes in cash. Changes in underlying fundamentals might dictate changes in cash to new optimal levels. Alternatively, suboptimal changes in cash might result from agency costs allowing managers’ actions to diverge from the best interests of shareholders. We predict and find that both suboptimal increases and decreases in cash bode poorly for future earnings. In fact, we find that suboptimal increases (decreases) in cash have less (greater) persistence than any of the earnings components we study, including accruals and net distributions to both shareholders and debt holders. Market efficiency tests indicate that the market severely punishes firms with suboptimal decreases in cash, but we find no evidence to support the hubris hypothesis that the market overreacts to the earnings implications of unwarranted increases in cash.

Prior literature portrays long-term growth (LTG) forecasts as nonsensical from a valuation perspective. Instead, we hypothesize that LTG forecasts signal high effort and ability to analyze firms' long-term prospects. We document stronger market response to stock recommendation revisions of analysts who publish accompanying LTG forecasts. We also hypothesize and find that these analysts are less likely to leave the profession or move to smaller brokerage houses. Consistent with Reg. FD's intention to promote fundamental analysis of long-term earnings prospects, post-Reg. FD observations drive our results. Overall, we identify previously undocumented benefits accruing to analysts who publish LTG forecasts.