We examine the impact of stock-price formation process on firms’ dividend smoothing using Regulation SHO. We find that pilot firms are more likely to increase dividends and less likely to omit them during the pilot program; however, they are more likely to decrease dividends after the program ends. These firms also smooth less and have higher adjustment speeds. Our findings are more pronounced for firms with higher information asymmetry, stronger financials, and weaker governance. In general, this study shows that financial markets tend to have a significant and long-lasting impact on dividend smoothing policy.

This study examines the impact of auditor quality on financial covenants in debt contracts. We conjecture that high‐quality auditors have two related effects on these debt covenants: (i) they encourage fewer and less restrictive covenants by providing assurance to lenders at contract inception and, consequently, (ii) they ensure a lower probability of eventual covenant violations. Consistent with the conjectures, we find that auditor quality is negatively associated with the intensity and tightness of financial covenants. Specifically, high‐quality auditors are associated with fewer covenants (especially performance covenants) and less binding covenants. Additionally, we find that auditor quality is negatively associated with the likelihood of covenant violations. In an ancillary test, we provide evidence that high‐quality auditors mitigate the detrimental effect of covenant violations on the cost of borrowing. Together, these findings highlight the important role of auditors in debt contracting.

Prior studies find mixed evidence about the substitution relation between bank credit and trade credit. In this paper, using two bank interest rate deregulations in China, we revisit the substitution hypothesis by examining how exogenous increases in the availability of bank credit affect trade credit. We find that firms with higher credit risk increased their use of bank credit and reduced their use of trade credit after the 2004 bank interest rate ceiling deregulation, whereas firms with lower credit risk increased their use of bank credit and reduced their use of trade credit after the 2013 bank interest rate floor deregulation. Our results provide supportive evidence for the substitution hypothesis that firms reduce their use of trade credit after the relaxation of bank credit and suggest that bank credit is more favorable short-term financing than trade credit.

This study identifies a new economic benefit of common institutional ownership, which refers to the increasingly contentious phenomenon of U.S. firms sharing stockholders with their industry competitors. We find a significantly negative relation between common ownership and insider trading profitability. The disciplinary effect of common ownership on opportunistic insider trading is particularly evident when the information effects of common ownership are greater, when common owners are more likely to benefit from positive governance externalities, and in the subset of trades made by opportunistic insiders. Using the exogenous variations in common ownership induced by financial institution mergers, we conduct a difference-in-differences analysis and find consistent results. We also provide evidence that common owners encourage firms to impose ex-ante restrictions on insider trading and take ex-post actions to discipline opportunistic insiders by voting against management. Overall, our findings suggest that common institutional shareholders have information advantages, governance incentives, and effective means to constrain opportunistic insider trading.

This paper investigates the effect of CFO gender on corporate financial reporting decision making. Focusing on firms that experience changes of CFO from male to female, the paper compares the firms' degree of accounting conservatism between pre‐ and post‐transition periods. We find that female CFO s are more conservative in their financial reporting. In addition, we find that the relation between CFO gender and conservatism varies with the level of various firm risks, including litigation risk, default risk, systematic risk, and CFO ‐specific risk such as job security risk. We further find that the risk aversion of female CFO s is associated with less equity‐based compensation, lower firm risk, a higher tangibility level, and a lower dividend payout level. Overall, the study provides strong support for the notion that female CFO s are more risk averse than male CFO s, which leads female CFO s to adopt more conservative financial reporting policies.

We show that firms led by politically partisan CEOs are associated with a higher level of corporate tax sheltering than firms led by nonpartisan CEOs. Specifically, Republican CEOs are associated with more corporate tax sheltering even when their wealth is not tied with that of shareholders and when corporate governance is weak, suggesting that their tax sheltering decisions could be driven by idiosyncratic factors such as their political ideology. We also show that Democratic CEOs are associated with more corporate tax sheltering only when their stock-based incentives are high, suggesting that their tax sheltering decisions are more likely to be driven by economic incentives. In sum, our results support the political connection hypothesis in general but highlight that the specific factors driving partisan CEOs' tax sheltering behaviors differ. Our results imply that it may cost firms more to motivate Democratic CEOs to engage in more tax sheltering activities because such decisions go against their political beliefs regarding tax policies.

We find that social capital, as captured by associational networks and social norms in US counties where corporate headquarters are located, is positively associated with cash dividend payouts in local firms. The positive effect is incremental to other known local factors affecting dividends, is robust to a range of sensitivity analyses, and extends to corporate decisions about whether to pay dividends or not. Social capital mitigates managerial private financial incentives to limit dividends and encourages higher dividends among firms facing greater free cash flow problems. Social capital also attenuates over-investment of free cash flow.

Using a large US sample, we find a significant and positive relation between patents and corporate tax planning, and the effect is incremental to the effect of R&D on tax planning. We employ a quasi‐natural experiment based on staggered industry‐level innovation shocks to identify the positive causal effect of patents on corporate tax planning. We also find that patents are not associated with tax planning for domestic firms, but their association with tax planning is concentrated in multinational firms, which have the ability to shift domestic income to low‐tax countries. Moreover, we find that the identified effect mainly exists in the post–check‐the‐box (CTB) rule period when shifting income among affiliates becomes more flexible and convenient. Finally, we use two income‐shifting models and find that patents, rather than R&D, facilitate tax planning through an income‐shifting channel. Overall, our results suggest that R&D and patents facilitate firms' tax planning in distinct ways: R&D facilitates tax planning as intended through tax credits and deductions, whereas patents are used by taxpayers to avoid taxes aggressively through income shifting.

This paper investigates whether banking liberalization affects corporate tax planning by exploiting China's two interest rate deregulations as quasi-natural experiments. We find that firms reduce their level of tax avoidance following banking liberalization and that the identified effect is concentrated in firms with more bank borrowing after liberalization, firms located in non-financial centers, as well as non-SOE firms and firms with fewer political connections. In addition, we find that firms reduce their use of related party transactions and tax-related bribery after banking liberalization. Our results suggest that firms engage in less tax avoidance with more available/cheaper external financial resources and that, on average, the costs of engaging in tax avoidance are higher than the costs of borrowing from banks.

We investigate the effect of agency conflicts between shareholders and debtholders on aggressive tax avoidance using a unique setting of dual holders who simultaneously hold equity and debt of the same firms. We find robust evidence that firms with dual holders exhibit more aggressive tax behavior even after controlling for endogeneity, suggesting that shareholder-debtholder conflicts induce firms to underinvest in tax aggressiveness. In addition, there exists a concave relation between tax aggressiveness and dual owners’ debt exposure relative to their overall debt and equity exposures to the investee firms. Further tests show that the effect of dual ownership on tax aggressiveness is more pronounced among firms with higher risk-shifting tendencies and higher managerial risk-taking incentives. Finally, our bond borrowing cost test shows that dual holdings mitigate the increased cost of borrowing due to aggressive tax avoidance.