ABSTRACT We investigate whether management's decision regarding the recognition of the valuation allowance (VA) for deferred tax assets provides incremental information about the persistence of accounting losses. We introduce a classification scheme that assigns loss firm‐years into three categories based on whether management appears to have recognized a material change in the VA, and whether or not the firm has positive taxable income (e.g., a net operating loss). The results of our study show that our tax categories contain information about the persistence of accounting losses over the following three years beyond variables previously identified to predict loss persistence. This incremental information is consistent with management using private information about the firm's future prospects in setting the VA. Finally, we find that investors’ pricing of the VA varies with the saliency of the tax signal and the information environment of the firm.

We survey over 1,000 venture capitalists (VCs) on how the COVID-19 pandemic has affected their decisions and investments. Despite the historical importance of in-person meetings, VCs do not report difficulty finding quality entrepreneurs or major changes in time allocation. They do report difficulty in evaluating deals, more investor-friendly terms, and a decreased investment rate, with about one-sixth of VCs reporting pressure from limited partners to conserve capital. Although aggregate returns are largely unchanged, there is high dispersion both within and across funds. A follow-up survey shows faster-than-expected recovery in deal volume, terms, and returns.

We survey 885 institutional venture capitalists (VCs) at 681 firms to learn how they make decisions. Using the framework in Kaplan and Strömberg (2001), we provide detailed information on VCs’ practices in pre-investment screening (sourcing evaluating and selecting investments), in structuring investments, and in post-investment monitoring and advising. In selecting investments, VCs see the management team as somewhat more important than business-related characteristics such as product or technology although there is meaningful cross-sectional variation across company stage and industry. VCs also attribute the ultimate investment success or failure more to the team than to the business. While deal sourcing, deal selection, and post-investment value-added all contribute to value creation, the VCs rate deal selection as the most important of the three. We compare our results to those for chief financial officers (Graham and Harvey, 2001) and private equity investors (Gompers et al., 2016a).

Audit firms hesitate to take full advantage of data and analytics (D&A) audit approaches because they lack certainty about how external reviewers evaluate those approaches. We propose that external reviewers use an effort heuristic when evaluating audit quality, judging less effortful audit procedures as lower quality, which could shape how external reviewers evaluate D&A audit procedures. We conduct two experiments in which experienced external reviewers evaluate one set of audit procedures (D&A or traditional) within an engagement review, while holding constant the procedures' level of assurance. Our first experiment provides evidence that external reviewers rely on an effort heuristic when evaluating D&A audit procedures—they perceive D&A audit procedures as lower in quality than traditional audit procedures because they perceive them to be less effortful. Our second experiment confirms these results and evaluates a theory‐based intervention that reduces reviewers' reliance on the effort heuristic, causing them to judge quality similarly across D&A and traditional audit procedures.

Private equity performance, both for buyouts and venture capital, has been highly cyclical: periods of high fundraising have been followed by periods of low performance. Despite this seemingly predictable variation, we find modest gains, at best, to pursuing realistic, investable strategies that time capital commitments to private equity. This occurs, in part, because investors can only time their commitments to funds; they cannot time when commitments are called or when investments are exited. There is a high degree of time-series correlation in net cash flows even across commitment strategies that allocate capital in a very different manner over time.

ABSTRACT Research documents that firms shift operating expenses into income-decreasing, but not income-increasing, discontinued operations. We argue that valuation considerations explain this asymmetric result, as acquirers are likely to value the earnings of income-increasing discontinued operations more highly than the earnings of income-decreasing discontinued operations. Using a large sample of hand-collected data, we show that pre-tax earnings and operating expenses are significantly more value-relevant for income-increasing discontinued operations, supporting our economic explanation for why firms do not shift operating expenses into income-increasing discontinued operations. Additional analysis shows that in situations where managers are constrained from shifting operating expenses due to valuation concerns, they shift tax expense (an expense that is less value-relevant) from continuing operations into income-increasing discontinued operations. Overall, we conclude that valuation considerations constrain firms from shifting operating expenses into income-increasing discontinued operations, but do not constrain firms shifting tax expenses.