We estimate real losses arising from the cross‐sectional misallocation of financial liabilities. Extending a production‐based framework of misallocation measurement to the liabilities side of the balance sheet and using manufacturing firm data from the United States and China, we find significant misallocation of debt and equity in China but not the United States. Reallocating liabilities of firms in China to mimic U.S. efficiency would produce gains of 51% to 69% in real value‐added, with only 17% to 21% stemming from inefficient debt‐equity combinations. For Chinese firms that are large or in developed cities, we estimate lower distortionary financing costs.

We analyze whether tough IRS monitoring generates a positive externality by constraining managers' bad news hoarding activities. Supporting this prediction, we find a negative relation between the threat of an IRS audit and stock price crash risk. Our evidence is consistent with recent theory that outside investors learn more about firms when tax enforcement is stricter. Additionally, path analysis suggests that the monitoring channel (direct path) plays a critical role in shaping crash risk relative to information asymmetry channels of tax planning and accruals manipulation (indirect paths). Consistent with other predictions, we find that the monitoring role of IRS audits intensifies when firms experience worse agency conflicts stemming from CEO power and incentives. Collectively, our research implies that external monitoring by tax authorities protects shareholders against managers suppressing negative firm-specific information that engenders stock price crash risk, particularly when CEOs have wider scope and stronger incentives to hoard bad news.

We investigate whether corporate insiders attempt to circumvent insider trading restrictions by using their private information to facilitate trading in economically linked firms, a phenomenon we call “shadow trading.” Using measures of informed trading to proxy for shadow trading, we find increased levels of informed trading among business partners and competitors before a firm releases private information. To rule out alternative explanations, we examine two shocks to insiders' incentives to engage in shadow trading: high-profile regulatory enforcement against conventional insider trading, and staggered changes to their outside employment opportunities. Finally, we document attenuated levels of informed trading among business partners and competitors when firms prohibit shadow trading. Overall, we provide evidence that shadow trading is an undocumented and widespread mechanism that insiders use to avoid regulatory scrutiny. Data Availability: Data are available from the public sources cited in the text.

The Patient Protection and Affordable Care Act (ACA) requires that insurers spend a minimum amount of their premium revenue on policyholder benefits. The Act specifies enforcement via a combination of insurer self-reporting, government examinations, and payment of policyholder rebates in cases where insurers fail to meet the required spending amount. We find that insurers' reported estimates are consistently overstated in situations in which more accurate estimates would have triggered rebate payments; publicly traded insurers (particularly those exhibiting poor financial reporting quality) exhibit the strongest evidence of strategic over-estimating. In aggregate, we estimate that approximately 14 percent of insurers engage in strategic over-estimates, and that insurer over-estimates resulted in hundreds of millions of dollars in underpaid policyholder rebates. Our study illustrates how a combination of regulatory design choices and lax oversight can weaken the effectiveness of accounting-based regulation and have substantial economic consequences.

Prior literature presents various perspectives on the role of financial reporting. One view is that mandatory periodic reporting disciplines managers and encourages timely voluntary disclosure. We examine this “confirmation hypothesis” using the shock to financial reporting quality experienced by Arthur Andersen clients forced to switch auditors. Consistent with the confirmation hypothesis, we find that former Andersen clients increase disclosure after they change auditors. They increase forecasting frequency and enhance forecasting precision and specificity. We present additional cross-sectional evidence that shows Arthur Andersen clients with larger increases in financial reporting quality increased their disclosure by relatively more, even within the sample of Arthur Andersen clients. We supplement our main findings with a battery of tests to reduce the possibility that alternative shocks and uncertainty drive our results. Our findings support complementarity between financial reporting quality and voluntary disclosures.

In an online experiment, the immediate (Roth) versus deferred taxation of retirement income affects taxpayers' investment decisions such that tax-deferred plan investors under-adjust for future tax burdens and overestimate their future wealth compared to Roth investors. When presented with a specific after-tax monetary goal, Roth account holders invest more in higher-risk, higher-return assets than tax-deferred account holders. We investigate four aspects of this investment context that could alleviate these differences: (1) implementing a “do-your-best” goal, (2) reframing specific goals in pre-tax dollars, (3) explicitly prompting investors to estimate future tax burdens, and (4) providing performance feedback. These interventions reduce differences between Roth and tax-deferred investor behaviors, but do not entirely close the gap on their own. In combination, reframing goals and prompting future tax estimations encourage tax-deferred account holders to invest in risky assets to the same degree as Roth investors only when paired with performance feedback.

We compare two approaches to increasing tax revenue: tax administration and tax rates. We show that when Indonesia moved top regional firms into “medium taxpayer offices,” with high staff-to-taxpayer ratios, tax revenue more than doubled. Examining nonlinear changes to corporate income tax rates, we estimate an elasticity of taxable income of 0.579. Combining these estimates, improved tax administration is equivalent to raising top rates on all firms by 8 percentage points. On net, improved tax administration can have significant returns for developing countries.

Using a global sample of multinational corporations (MNCs) and their foreign subsidiaries, we find that repatriation taxes impair subsidiary-level investment efficiency. Consistent with internal agency conflicts between the central management of the MNC and the manager of the foreign subsidiary being the driver, we show that this effect is concentrated in subsidiaries with high information asymmetry and in subsidiaries that are weakly monitored. Quasi-natural experiments in the U.K. and Japan establish a causal relationship for our findings and suggest that a repeal of repatriation taxes increases subsidiary-level investment efficiency while reducing the level of investment. Our paper provides timely empirical evidence to inform expectations for the effects of a recent change to the U.S. international tax law that eliminated repatriation taxes from most of the future foreign earnings of U.S. MNCs. JEL Classifications: H21; H25; F23; G31. Data Availability: Data are available from the public sources cited in the text.

A central challenge in securing property rights is the subversion of justice. We present a model of a polluter whose discharges harm multiple owners, and we compare property rules, liability rules, and regulation on efficiency grounds. We provide conditions under which property rules are preferred to liability rules, thus verifying the Calabresi-Melamed conjecture. Regulation that enforces partial abatement may be preferred to either of the extreme rules. An empirical analysis of water quality in the United States before and after the Clean Water Act shows that the effects of regulation are consistent with several predictions of the model.

We provide an easy method to identify marketable retail purchases and sales using recent, publicly available U.S. equity transactions data. Individual stocks with net buying by retail investors outperform stocks with negative imbalances by approximately 10 bps over the following week. Less than half of the predictive power of marketable retail order imbalance is attributable to order flow persistence, while the rest cannot be explained by contrarian trading (proxy for liquidity provision) or public news sentiment. There is suggestive, but only suggestive, evidence that retail marketable orders might contain firm‐level information that is not yet incorporated into prices.