Harris and Kemsley (J. Account. Res. (1999) 275) suggest that shareholder-level dividend taxes on retained earnings are fully impounded into stock prices at the top statutory rate. Harris and Kemsley base their empirical tests on Ohlson (Contemp. Account. Res. (1995) 661) with the addition of dividend taxes. We analyze Harris and Kemsley's extended Ohlson model and evidence. We show that the model, tests, and results in Harris and Kemsley are non-diagnostic regarding dividend tax capitalization.

ABSTRACT We construct a new, parsimonious, measure of disclosure quality—disaggregation quality (DQ)—and offer validation tests. DQ captures the level of disaggregation of accounting data through a count of nonmissing Compustat line items, and reflects the extent of details in firms’ annual reports. Conceptually, DQ differs from existing disclosure measures in that it captures the “fineness” of data and is based on a comprehensive set of accounting line items in annual reports. Unlike existing measures, which are usually applicable for a subset of firms or are based on a subset of information items, DQ can be generated for the universe of Compustat industrial firms. We conduct three sets of validation tests by examining DQ's association with variables predicted by prior literature to be associated with information quality. DQ is negatively (positively) associated with analyst forecast dispersion (accuracy) and negatively associated with bid‐ask spreads and cost of equity. These associations continue to hold after we control for firm fundamentals. Taken together, results from this battery of validation tests are consistent with our measure capturing disclosure quality.

ABSTRACT While managers' career concerns have been shown to be influential in shaping their decisions, there is little evidence of the impact such concerns may have on managers' tax avoidance incentives. This study examines the causal effect of managers' career concerns on tax avoidance using the staggered recognition by state courts of the inevitable disclosure doctrine (IDD), a trade secret protection doctrine that places greater restrictions on managers from joining or forming a rival company. We argue that the IDD recognition increases the cost of job loss for managers whose current jobs may be in jeopardy, thereby increasing their incentive to avoid taxes in order to positively change their current employer's evaluation of their ability. The IDD recognition also reduces outside opportunities for high‐ability managers, and thereby reduces their incentive to avoid taxes in order to positively change external employers' evaluation of their ability. Using a difference‐in‐differences design, we provide evidence consistent with these predictions. We further show these effects are stronger for CEOs in their early years of service in the focal firms when the market is more uncertain about their ability. Our findings suggest that managers take into account the impact of tax avoidance on their career outcomes when making tax avoidance decisions.

ABSTRACT We examine whether accrual earnings quality is a priced information risk factor in a dividend change setting. We define information risk as the probability that firm‐specific financial statement information pertinent to investor pricing decisions is of low precision, and use the factor‐mimicking portfolio returns formed on the Dechow‐Dichev [2002] accrual quality (AQ) metric to proxy for the information risk (IR) factor returns. We augment the Fama‐French three‐factor model with this IR factor, and find that dividend initiation and increase firms exhibit a decrease in the factor loadings on the IR factor while dividend decrease firms exhibit an increase in the corresponding factor loadings, but such changes in the factor loadings occur months prior to the dividend change announcements. The results are robust to further controls for operating risk and using an alternative measure of information risk. Further analysis on changes in information characteristics such as AQ, the probability of informed trading score (PIN), forecast dispersion, and return volatility surrounding dividend change events are consistent with the asset pricing results. Overall, we interpret our results as being consistent with investors treating the information risk associated with the precision of financial statement information as a priced risk factor, with both the precision and pricing changing in predictable directions around dividend changes. However, while we attempt to control for operating risk changes in additional tests, we cannot completely rule out changes in operating risk as a competing alternative explanation for our observed results.

We survey companies and find that many use incorrect tax rate inputs into important corporate decisions. Specifically, many companies use an average tax rate (the GAAP effective tax rate, ETR) to evaluate incremental decisions, rather than using the theoretically correct marginal tax rate. We find evidence consistent with behavioral biases (heuristics, salience) and managers' educational backgrounds affecting these choices. We estimate the economic consequences of using the theoretically incorrect tax rate and find that using the ETR for capital structure decisions leads to suboptimal leverage choices and using the ETR in investment decisions makes firms less responsive to investment opportunities.

ABSTRACT We develop a linear corporate tax function where taxes paid are regressed on pre-tax income and an intercept. We show that if the intercept is positive, cash ETRs are a convex function of pre-tax income. We present large-sample evidence consistent with this ETR convexity. Thus, although firms may have stable linear tax functions (i.e., constant parameters in the linear tax model) representing stable tax avoidance behavior, ETRs can change over time because of growth in pre-tax income. Consequently, simply examining changes (or differences) in cash ETRs is nondiagnostic about whether tax avoidance has changed over time (or differs across firms). We illustrate our argument by showing that all of the observed downward trend in cash ETRs documented by Dyreng et al. (2017) can be explained by growth in pre-tax income. The wholesale concern about increased tax avoidance over time might be overstated. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G39; H20; H25; H26.

ABSTRACT Although agency theory suggests that firms should index executive compensation to remove market‐wide effects (i.e., RPE), there is little evidence to support this theory. Oyer (2004, Journal of Finance 59, 1619–1649) posits that an absence of RPE is optimal if the CEO's reservation wages from outside employment opportunities vary with the economy's fortunes. We directly test and find support for Oyer's (2004) theory. We argue that the CEO's outside opportunities depend on his talent, as proxied by the CEO's financial press visibility and his firm's industry‐adjusted ROA. Our results are robust to alternate explanations such as managerial skimming, oligopoly, and asymmetric benchmarking.

ABSTRACT We examine the effects of the 2017 Tax Cuts and Jobs Act's (TCJA) interest deduction limitation on suppliers. Using a difference‐in‐differences design, we find that suppliers with customers subject to the limitation (“affected suppliers”) report increased accounts receivable of between 11.2% and 14.9% relative to their pre‐TCJA average accounts receivable. Using a triple differences design, we provide more granular evidence by documenting that the limitation's effects on affected suppliers' accounts receivable are driven by suppliers with customers that report increased trade credit use (i.e., higher accounts payable). In cross‐sectional analyses, we find that the effects are stronger when suppliers are smaller, have higher peer product similarity, operate in industries with low entry barriers, or are in the early stage of their life cycle, consistent with suppliers with weaker bargaining power providing more trade credit to customers compared to other suppliers. Turning to supplier consequences of increased accounts receivable, we find that affected suppliers' days sales outstanding and operating cycles increase. Next, we use path analyses to find that affected suppliers experience lower cash flows and higher risks due to their increased accounts receivable. Overall, our study provides evidence that the interest deduction limitation yielded externalities on affected firms' supply chains.

We conduct a field survey to investigate whether current mid-level and future entry-level managers (collectively managers) subjectively value stock options and restricted stock consistent with economic theory. We find that managers, on average, subjectively value stock options at greater than their Black-Scholes value and greater than fair-value equivalent restricted stock. This result contrasts with conventional economic wisdom that risk-averse employees discount the Black-Scholes value of an option. With respect to stock options, our results also reveal that managers, on average, have a lottery ticket mentality when subjectively valuing options, they value shorter vesting periods, and they value longer terms to maturity. With respect to stock options and restricted stock, we find that managers tend to extrapolate recently rising stock price trends to arrive at their subjective values. Overall, our results suggest that in some cases standard economic theory does not accurately reflect how managers appear to subjectively value stock options and restricted stock.