We study the impact of disclosure and inattention on the decision to retain fee-based financial advice using a two-tiered natural regulatory experiment. Increased salience in fee disclosure raises the drop rate for advice, implying improved attention — particularly for relatively sophisticated investors. However, a novel auto-drop requirement for inattentive investors generates far more drops, implying limited attention despite salient disclosure — particularly for the unsophisticated. Contrary to studies of commission-based advice, we find that investors benefit from fee-based advice. Benefits are higher for less sophisticated investors, who tend to be detrimentally auto-dropped. Drops triggered by salient disclosure tend to be beneficial.

Social interactions determine many economic behaviours, but information on social ties does not exist in most publicly available and widely used datasets. We present results on the identification of social networks from observational panel data that contains no information on social ties between agents. In the context of a canonical social interactions model, we provide sufficient conditions under which the social interactions matrix, endogenous and exogenous social effect parameters are globally identified if networks are constant over time. We also provide an extension of the method for time-varying networks. We then describe how high-dimensional estimation techniques can be used to estimate the interactions model based on the adaptive elastic net Generalized Method of Moments. We employ the method to study tax competition across U.S. states. The identified social interactions matrix implies that tax competition differs markedly from the common assumption of competition between geographically neighbouring states, providing further insights into the long-standing debate on the relative roles of factor mobility and yardstick competition in driving tax setting behaviour across states. Most broadly, our identification and application show that the analysis of social interactions can be extended to economic realms where no network data exist.

This study uses valuation allowances (VAs) for deferred tax assets to examine whether hedge fund activists (HFAs) use and affect financial reporting of income taxes. Specifically, we investigate whether HFAs target firms with VAs and whether target firms are more likely to release VAs post‐intervention. We find that the existence, magnitude, and increases in VAs increase the marginal probability that HFAs will target a firm by between 12% and 24%. We also find that target firms are 4.6% more likely to release VAs following the intervention, and this effect persists for up to 2 years. Releases of VAs appear to stem from implemented tax avoidance strategies and changes in financial reporting of income taxes rather than real changes in operating performance or earnings management. Overall, HFAs appear to understand the interplay between tax planning and financial reporting of income taxes and use both to unlock value in target firms.

ABSTRACT Theory posits that when managers anticipate excess capacity, average q becomes a biased estimator of marginal q as the potential for underutilizing new capital reduces the marginal benefit of investing. After correcting for this source of measurement error, the explanatory power of Tobin's q substantially improves in time‐series and cross‐sectional regressions as well as in out‐of‐sample tests. These findings, together with a secular erosion in capacity utilization, help explain why corporate investment rates have been declining for decades despite average q increasing significantly. Our analysis indicates that economic rigidities have contributed to the persistent erosion in capacity utilization.

Statement of Financial Accounting Standards (SFAS) 141 (Accounting Standards Codification [ASC] 805) requires that firms record identifiable assets and liabilities acquired in business combinations at fair value. While the FASB argued that these fair values should provide users with incremental decision‐useful information, opponents have continuously argued that they are too difficult to reliably estimate and could be subject to managerial discretion. Using hand‐collected data from US mergers and acquisitions, we find that, on average, fair value adjustments predict future cash flows incrementally beyond pre‐deal book values and cash flows, goodwill, and other firm and deal characteristics. We also find that the relation between fair value adjustments and future cash flows varies predictably based on several factors that affect managers' ability and incentives to provide accurate estimates. Furthermore, despite prevailing concerns about their usefulness, we find that fair values for intangible assets predict future cash flows, on average. However, we find that this relation is driven primarily by the fair values of customer‐ and contract‐related intangible assets and that the fair values of other types of identifiable intangibles do not necessarily convey incremental decision‐useful information. Finally, we find that users appear to rely on the information conveyed by these disclosures, as evidenced by revisions to analysts' forecasts and changes in stock prices. Overall, our findings provide insight regarding the usefulness of current standards and users' reliance on fair values in business combinations.

ABSTRACT We investigate how audit firms balance the tension between professional responsibility and client service by examining changes in partner assignments following adverse internal control opinions (ICOs). We find that partners are significantly more likely to be reassigned when they issued an adverse ICO to any of their clients in the previous year. Further, partners issuing adverse ICOs experience unfavorable changes in their client portfolios in the form of lower fees and less prestigious assignments. We find that consequences are more negative when adverse ICOs are issued to clients that are more important to the local office and that there are no consequences when partners issue continuing adverse opinions to clients they have “inherited” from an original adverse ICO partner. We also find that the consequences are stronger for partners of non‐Big 4 audit firms that are likely to be more sensitive to client service considerations. The negative portfolio effects we observe persist for at least three years, and our findings are robust to restrictions involving mandatory partner rotation and adverse ICOs that lead to client loss. Overall, our results are consistent with adverse ICO partners experiencing negative consequences as audit firms respond to client service incentives in the area of internal controls over financial reporting.

ABSTRACT We examine whether the local administration of sales taxes (as opposed to a more streamlined state administration) affects the real economy for businesses complying with the tax. We study this question in the Florida hotel industry, as counties in Florida can choose to locally administer the county‐level tourist tax or have the state administer the county‐level tax along with the state‐level tourist tax. Local administration is popular because it supports local employment (of tax administrators) and provides more stringent enforcement on non‐commercial operators (e.g., private rentals). State administration, however, has fewer compliance costs for hotels (e.g., reduced filings and fewer audits). Commentary from the profession suggests the incremental compliance costs of local administration can be considerable. We find that counties switching from state to local administration of tourist taxes is associated with slower growth in aggregate hotel payroll and employment, consistent with local tax administration increasing compliance costs to the point that affected businesses cut other services.

Reciprocity plays a critical role in the way employees respond to managerial control decisions. The current consensus is that employees punish managers for implementing unkind controls (negative reciprocity) more than they reward managers for implementing kind controls (positive reciprocity). We challenge this consensus. Prior research focuses on settings that emphasize employees' immediate reciprocal responses. However, in the workplace, employees often respond over long periods of time to sticky control decisions (e.g., budgets, pay, decision rights). Focusing on these long‐term settings, we predict and find that, while negative reciprocity is initially stronger than positive reciprocity, it also fades more over time than positive reciprocity. This differential fading is so pronounced in our setting that positive reciprocity is stronger overall in the long run. Thus, in long‐term settings, positive responses to kind controls may play a more important role than negative responses to unkind controls. Our results inform managerial decisions about the use of kind versus unkind controls and suggest potential long‐term benefits of pay disparity and other policies that treat employees differentially.

In this study, we examine whether environmental, social, and governance (ESG) funds' investment decisions are sensitive to the existence and extent of firms' voluntary environmental disclosures. We create our measures of voluntary environmental disclosure using bigrams extracted from the Global Reporting Initiative standards. We provide robust evidence that voluntary environmental disclosure in conference calls is associated with greater ESG fund ownership in the subsequent period, incremental to firms' ESG ratings. We also provide evidence that fund managers' reliance on environmental disclosure is concentrated in water, waste, emissions, and compliance disclosures. ESG fund ownership increases with environmental disclosure that is more positive and specific. Our primary finding persists both when we rely on the sustainability report as an alternative proxy for environmental disclosure and when we use fund‐level tests. Overall, our evidence is consistent with ESG funds relying on firms' disclosures when making investing decisions and inconsistent with recent regulatory concerns that ESG fund managers are not following through on their stated investing strategies.

ABSTRACT The Organization for Economic Cooperation and Development introduced country‐by‐country reporting (CbCR) for multinational enterprises (MNEs) to help tax authorities combat tax‐motivated income shifting. This study uses confidential U.S. tax administrative data from 2011 to 2018 to examine the effect of U.S. CbCR adoption on the tax‐motivated income shifting and real activities of U.S. MNEs. We first document that while U.S. CbCR provides the Internal Revenue Service with incremental information about the location of U.S. MNEs’ global activities relative to existing U.S. tax return disclosures, substantial overlap exists between U.S. CbCR and existing disclosures. In contrast with prior CbCR studies in cross‐country settings, we fail to find evidence of a change in U.S. MNEs’ tax‐motivated income shifting or a reallocation of real activities based on tax incentives in response to U.S. CbCR using multiple empirical approaches. Overall, our study leverages U.S. tax administrative data to provide insights into the impact of the CbCR initiative on U.S. MNEs.