Do language skills affect investment decisions? This article addresses this question by identifying the effect of English proficiency on the stock market participation of immigrants in the United States and Australia. To establish causality, we construct an instrumental variable for English proficiency by exploiting the phenomenon that younger children acquire languages more easily than older children. We find that English proficiency has a significant positive effect on stock ownership among immigrants in both countries. Moreover, we provide evidence that a reduction in information costs and an increase in trust may serve as the mechanisms underlying the language ability effect.

We conduct two experiments to investigate the joint effect of two justification factors of earnings management—namely, attribution for the firm's underperformance and benefits accruing to other employees from inflating reported earnings. This investigation is important because prior research examines the effects of individual justification factors, whereas real‐world settings entail more complexity involving multiple justification factors. In Experiment 1, we predict and find that managers are more likely to manage earnings when the firm's underperformance is caused by an external event and misreported earnings benefit other employees besides the reporting manager. Furthermore, we show that the extent to which participants use moral justifications mediates the effect of benefits sharing on earnings management, but only when causal attribution is external, and that it mediates the effect of causal attribution on earnings management, but only when benefits are shared. In Experiment 2, we use a neutral control condition that makes no mention of inconsistent incentives to demonstrate that it is the combination of causal attribution and benefits sharing that triggers earnings management. We contribute to the accounting and psychology literature by proposing and testing a theory that explains how multiple justification factors interact to cause opportunistic behavior. Our results suggest that policy‐makers and governing parties should consider developing a holistic view of possible justification factors, focusing on situational opportunities created by combinations of factors rather than individual factors alone.

Following Kamenica and Gentzkow, this paper studies persuasion as an information design problem. We investigate how mistakes in probabilistic inference impact optimal persuasion. The concavification method is shown to extend naturally to a large class of belief updating rules, which we identify and characterize. This class comprises many non-Bayesian models discussed in the literature. We apply this new technique to gain insight into the revelation principle, the ranking of updating rules, when persuasion is beneficial to the sender, and when it is detrimental to the receiver. Our key result also extends to shed light on the question of robust persuasion.

Dual holders, financial institutions that simultaneously hold the debt and equity claims of the same firms, increase corporate tax avoidance. The positive effect is more pronounced in firms with greater ex-ante risk-taking managerial incentives and higher short-term investor ownership. We also find that tax avoidance is associated with a lower cost of debt in the presence of dual holders. We suggest that after-tax awards are a mechanism through which dual holders influence corporate tax strategies. The evidence demonstrates that dual holding increases tax avoidance through mitigating shareholder–creditor conflicts. Our results are robust to endogeneity concerns and alternative tax avoidance measures.

Do potential entrepreneurs remain in wage employment because of concerns that they will face worse job opportunities should their entrepreneurial ventures fail? Using a Canadian reform that extends job-protected leave to one year for women giving birth after a cutoff date, we study whether the option to return to a previous job increases entrepreneurship. A regression discontinuity design reveals that a longer job-protected leave increases entrepreneurship by 1.9 percentage points. These entrepreneurs start incorporated businesses that hire employees, in industries in which experimentation before entry has low costs and high benefits.

Economists broadly agree that the economic burden of corporate taxes is not entirely borne by shareholders but also borne in part by employees and consumers. We examine corporate tax avoidance in a setting where shareholders do not bear the entire economic burden of the corporate tax. We show that the relation between corporate tax incidence and corporate tax avoidance depends on the elasticity of labor supply, the productivity of capital relative to labor, and the tax deductibility of labor and capital. These forces operate through two channels ( firm scale and input mix ), making the actual association between tax avoidance and incidence an empirical question. We find that firms whose shareholders bear less of the economic burden of corporate taxes engage in less avoidance. Our findings suggest that maximizing after‐tax profits might entail less tax avoidance if shareholders do not entirely bear the corporate tax burden. In particular, when the incidence of the corporate tax falls on the firm, firms avoid more taxes. This tendency is stronger if firms use a higher level of capital input, if the deductibility of the cost of capital investment is limited, if firms have high capital productivity, or if tax enforcement is strong.

We find that aggregate profitability and asset investment exhibit robust joint predictive power for aggregate excess stock returns, consistent with the investment model of Hou, Xue, and Zhang (henceforth HXZ, 2015). These results provide out-of-sample empirical support for HXZ, as the same mechanisms that HXZ use to explain firm-specific variation in stock returns can also be used to explain variation that is market-wide in nature. Also consistent with the HXZ investment model, we find that the growth rate of short-term (long-term) assets exhibits a stronger predictive power for one-year-ahead (two-year-ahead) stock returns.

We explicitly model financial reporting discretion and earnings management in an investment setting where managers have incentives to behave myopically. We show that when managers are sufficiently, but not excessively, myopic, granting them some discretion over the mandatory financial reports can lead to better investment decisions. This finding contrasts with the conventional argument that financial reporting discretion facilitates earnings management and exacerbates managerial myopia, leading to inefficient investments. Costly earnings management, while offering managers some ex post protection against bad luck by decreasing the incidence of low financial reports, reduces the expected net benefit of high financial reports ex ante. Consequently, managers with negative private information find it too costly to mimic those with positive private information, facilitating separation of managers through efficient investment. Thus, curbing managerial myopia by removing or overly restricting earnings management may have the unintended consequence of impairing investment efficiency.

Using the expected option-implied variance reduction to measure the sensitivity of stock returns to monetary policy announcement surprises, this paper shows monetary policy announcements require significant risk compensation in the cross section of equity returns. We develop a parsimonious equilibrium model in which FOMC announcements reveal the Federal Reserve’s private information about its interest-rate target, which affects the private sector’s expectation about the long-run growth-rate of the economy. Our model accounts for the dynamics of implied variances and the cross section of the monetary policy announcement premium realized around FOMC announcement days.