Abstract In the last two decades of accounting research, many studies have investigated the relation between accounting variables and risk-adjusted security returns. The earliest studies (e.g., Ball and Brown 1968) used simple, nonparametric methods and focused mainly on the question of whether accounting earnings are associated with residual equity returns. Subsequent studies made methodological refinements in both the measurement and the statistical techniques. One important statistical refinement was the "unexpected earnings response regression model" (UERRM), a linear statistical model that uses the unexpected earnings variable as a regressor to explain risk-adjusted returns.' The UERRM has become well-known, and many recent studies (e.g., Cornell and Landsman 1989, 686; Daley et al. 1988, 580; Doran et al. 1988, 392; Landsman and Damodaran 1989, 107; McNichols 1989, 15) have used some form of it as a "benchmark" model, against which to compare more complicated models. In one paradigm (so popular that it has become almost standard practice), various accounting variables are added to the UERRM, and their "incremental information content" is assessed by testing the statistical significance of their coefficients. The inferences derived from this procedure are, of course, conditional on the degree to which the UERRM is correctly specified. A critical problem caused by using a misspecified UERRM is that its least squares estimator can lead to erroneous inferences in the research design. Despite the UERRM's popularity, researchers have expressed concerns regarding its specification. For example, Lev (1989) recently surveyed a large number of research papers that used some form of an UERRM and found that for the most part R2s were low and often bordered on "the negligible." His table 1, which includes statistics from 19 studies, indicates that most reported R²s are less than 10 percent. Although low R²s are not proof of major specification problems, Lev does suggest that they are a cause for concern and may be the result of specification problems. Investigation of multiple specification problems is an important aspect of the present study because the various specification issues are interrelated. For example, nonnormality can be associated with nonlinearity, which, in turn, can be associated with heteroscedasticity or variation in the coefficients (Judge et al. 1985, 455, 814, 839). Thus, ad hoc tests for a single specification problem can be misleading and can fail to identify the fundamental problems. To our knowledge, no studies have comprehensively and formally evaluated the specification of the cross-sectional, ordinary least squares model that relates unexpected earnings to risk-adjusted security returns. Therefore, the purpose of this study is to test such a model systematically and empirically for specification problems Specifically, this study tests for nonlinearity, heteroscedasticity, residual nonnormality, omitted variables, and interfirm systematic and random coefficient variation. Also, when appropriate, adjusted R²-statistics are included to indicate the degree of misspecification information that is not directly observable from the tests themselves. A high degree of generality is obtained by using three samples of earnings forecasts as proxies for expected earnings. These were obtained from IBES financial analyst consensus forecasts, Value Line financial analyst forecasts, and COMPUSTAT-based time-series forecasts. Daily and monthly security returns are considered for short and long event-windows, respectively. In addition, one study recently published in The Accounting Review (Cornell and Landsman 1989) is replicated. The findings from all of the samples and the replication indicate that the specification error is large enough to affect conclusions regarding economic relationships. For example, in the replication, the specification problems are shown to lead to substantial instability in inferences from the model.

We find that the tail risk of a firm's stock returns is positively affected by the tail risk of other firms held by the same common institutional blockholder (CIB). The CIB peer effect on tail risk increases (decreases) after exogenous initiations (terminations) of peer connections via CIB ownership, consistent with a causal interpretation. Our findings support the disclosure herding hypothesis, which predicts that firms release bad news after other firms’ bad news announcements. In addition, commonality in the real investment decisions of a firm and its CIB peers, along with the common trading pressure of these firms, contribute to the positive relationship between firms’ tail risk, highlighting the multifaceted roles of institutional investors in the contagion of firms’ tail risk. Finally, the CIB peer effect on tail risk is stronger when the CEO is more risk averse, CIBs hold more shares, or CIBs are pressure-sensitive (i.e., banks and insurance companies).

Abstract This article shows that when a compensation peer firm experiences a significant failure in its say-on-pay (SOP) voting, the focal firm’s stock price is adversely affected, resulting in reduced CEO pay in the subsequent period. This pay-reduction effect is amplified when the board is more powerful, when proxy advisors express concerns about CEO pay, and when the compensation consultant lacks quality. Directors who react to the price drop and cut the CEO’s pay receive higher votes in future director elections, implying a market feedback effect for directors of the focal firm triggered by their peers’ SOP voting failure.

This paper investigates the effectiveness of using securities class action lawsuits in monitoring defendant firms by institutional lead plaintiffs from two aspects: (1) immediate litigation outcomes, including the probability of surviving the motion to dismiss and the settlement amount, and (2) subsequent governance improvement such as changes in board independence. Using a large sample of securities lawsuits from 1996 to 2005, we show that institutional investors are more likely to serve as the lead plaintiff for lawsuits with certain characteristics. After controlling for these determinants of having an institutional lead plaintiff, we show that securities class actions with institutional owners as lead plaintiffs are less likely to be dismissed and have larger monetary settlements than securities class actions with individual lead plaintiffs. This effect exists for various types of institutions including public pension funds. We also find that, after the lawsuit filings, defendant firms with institutional lead plaintiffs experience greater improvement in their board independence than defendant firms with individual lead plaintiffs. Our study suggests that securities litigation is an effective disciplining tool for institutional owners.

ABSTRACT 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.

ABSTRACT This paper examines the impact of hedge fund activism on corporate tax avoidance. We find that relative to matched control firms, businesses targeted by hedge fund activists exhibit lower tax avoidance levels prior to hedge fund intervention, but experience increases in tax avoidance after the intervention. Moreover, findings suggest that the increase in tax avoidance is greater when activists have a successful track record of implementing tax changes and possess tax interest or knowledge as indicated by their Securities and Exchange Commission (SEC) 13D filings. We also find that these greater tax savings do not appear to result from an increased use of high-risk and potentially illegal tax strategies, such as sheltering. Taken together, the results suggest that shareholder monitoring of firms, in the form of hedge fund activism, improves tax efficiency. JEL Classifications: G32; G34; H26. Data Availability: Data are available from sources identified in the text.

ABSTRACT This study examines whether politicians exhibit hometown favoritism in assigning preferential corporate income tax rates. We find that firms with hometown connections to incumbent provincial leaders experience favorable tax treatment. This effect is more pronounced when those leaders have strong hometown preferences and weaker when they have a strong incentive to seek promotion, suggesting that social incentives are the primary drivers of the effects on corporate tax benefits of hometown favoritism by politicians. Moreover, this effect is intensified when members of senior management have personal connections with the provincial leader. The mechanism test reveals that the provincial governments tend to qualify connected firms for preferential tax policies under their jurisdictions. Overall, our results suggest that hometown favoritism by politicians promotes tax benefits for business entities. Data Availability: Data are available from the public sources cited in the text. JEL Classification: H26; H71; M48.