Overconfidence and tax avoidance: The role of CEO and CFO interaction

We investigate how overconfident CEOs and CFOs may interact to influence firms’ tax avoidance. We adopt an equity measure to capture overconfident CEOs and CFOs and utilize multiple measures to identify companies’ tax-avoidance activities. We document that CFOs, as CEOs’ business partners, play an important role in facilitating and executing overconfident CEOs’ decisions in regard to tax avoidance. Specifically, we find that companies are more likely to engage in tax-avoidance activities when they have both overconfident CEOs and overconfident CFOs, compared with companies that have other combinations of CEO/CFO overconfidence (e.g., an overconfident CEO with a non-overconfident CFO), which is consistent with the False Consensus Effect Theory. Our study helps investors, regulators, and policymakers understand companies’ decision-making processes with regard to tax avoidance.     

Corporate Diversification and the Cost of Debt

The Journal of Real Estate Finance and Economics - This paper investigates whether corporate diversification by property type and by geography reduces the costs of debt capital. It employs...     

Why Are Earnings Kinky? An Examination of the Earnings Management Explanation

Prior research has documented a kink in the earnings distribution: too few firms report small losses, too many firms report small profits. We investigate whether boosting of discretionary accruals to report a small profit is a reasonable explanation for this kink. Overall, we are unable to confirm that boosting of discretionary accruals is the key driver of the kink. We caution the use of the ratio of small profit firms to small loss firms as a measure of earnings management. We investigate and discuss a number of alternative explanations for the kink.     

R&D and productivity: evidence from large UK establishments with substantial R&D activities

ABSTRACT

We use Office for National Statistics' micro data for large UK establishments in the production industries in the period 1997–2008 to study the relationship between their productivity and the presence of substantial R&D activities, either at the production unit itself, or at other UK reporting units owned by the same enterprise group. We estimate that total factor (revenue) productivity is on average about 14% higher at the establishments which have substantial R&D themselves, compared to those with no R&D. Among the establishments with no R&D themselves, we estimate that productivity is on average about 9% higher at those which belong to enterprise groups which do have substantial R&D elsewhere in the UK in the same sub-sector. For the establishments with substantial R&D themselves, we also estimate a significant positive relationship between current productivity and past R&D expenditure using dynamic specifications which allow for both establishment-specific ‘fixed effects’ and a serially correlated error component.     

On-line critiques in collaborative design studio

In this study, the Design Collaboration Model (DCM) was developed to provide a medium for the on-line collaboration of the design courses. The model was based on the situated and reflective practice characteristics of the design process. The segmentation method was used to analyse the design process observed both in the design diaries and the redline files that were composed of the problem domain and the design strategies. In the problem domain, it was observed that high emphasis was given to the design abstractions in the level of details of a space or sub-space. Also, the critics were more interested in the solution space than the problem space. As a design strategy, rejecting a solution was more practiced than proposing alternative solutions. Since the performance score of the students was highly correlated to the number of segments in critiques, it is concluded that quality rather than quantity of critiques determine the success level of proposed design solutions.

MONETARY AND FISCAL POLICY EFFICIENCY AND COORDINATION IN A MULTI‐SECTOR OPEN‐ECONOMY GENERAL EQUILIBRIUM MODEL

The paper analyzes monetary and fiscal stabilization and coordination in a multi‐sector stochastic new open economy macroeconomics (NOEM) model. It first aims to assess the capacity of fiscal and monetary policy to reduce or eliminate the negative welfare effects of an unanticipated productivity shock affecting some or all of the sectors in each country. Second, it evaluates the possible gains from international monetary cooperation as well as the impact of active fiscal policy on the welfare performance of monetary policy. The setup also allows for international asymmetry concerning the uncertainty over the shocks. The results show that monetary and fiscal policies are efficient tools of stabilization and under several conditions they can replicate the flexible‐price equilibrium. However, their welfare performance is not necessarily increased when both monetary and fiscal policies react to shocks at the national level. The existence of bilateral gains from monetary cooperation depends on the degree of asymmetry concerning the uncertainty over the shocks.     

Bargaining with endogenous disagreement: The extended Kalai-Smorodinsky solution

Following Vartiainen (2007) we consider bargaining problems in which no exogenous disagreement outcome is given. A bargaining solution assigns a pair of outcomes to such a problem, namely a compromise outcome and a disagreement outcome: the disagreement outcome may serve as a reference point for the compromise outcome, but other interpretations are given as well. For this framework we propose and study an extension of the classical Kalai-Smorodinsky bargaining solution. We identify the (large) domain on which this solution is single-valued, and present two axiomatic characterizations on subsets of this domain.     

When does financial integration matter for fiscal policy in a currency union? A welfare-based approach

We use a two-country new open economy macroeconomics model describing a currency union with imperfect financial integration. We assume that household preferences are biased towards the goods produced within the country. We use this setup to show how the degree of financial integration and the home bias affect the welfare efficiency of fiscal policy. This is particularly important for the implications of a fiscal policy launched by a member of the euro zone where the home bias is in a decreasing trend due to higher goods market integration and where there are explicit efforts to enhance financial integration. The results show in particular how the effects of an increasing financial integration on the impact of a fiscal policy can be mitigated or amplified by a decreasing home-product bias. Moreover, under certain conditions, the degree of financial integration has no effect on the welfare efficiency of fiscal policy despite its non-negligible effects on the components of welfare.     

Will the real R&D employees please stand up? Effects of tax breaks on firm-level outcomes

This paper evaluates the effect of tax incentives for research and development (R&D) on R&D spending and employment of R&D staff in a quasi-experimental setting. To do this, I exploit an exogenous reform in UK R&D tax policy, which changed the definition of an SME from firms with fewer than 250 employees to those with fewer than 500 employees. I use the UK Business Enterprise Research and Development Survey (BERD), for which companies do not have an incentive to relabel their ordinary employees or spending as R&D. I find that R&D tax incentives help to increase R&D spending at the company level; this translates to a user cost elasticity between ?0.88 and ?1.18. Further, the additional R&D generated through the tax relief can be attributed entirely to an increase in the number of R&D employees in the companies’ workforce. Together, these results challenge a common narrative on the role of R&D tax incentives.     

Audit Pricing for Strategic Alliances: An Incomplete Contract Perspective

We study the pricing of audit services for strategic alliances, a governance structure involving an incomplete contract between separate firms. Since incomplete contracts do not specify all future contingencies, we expect that the nonverifiability of information and potential agency behavior in alliances increase audit complexity, resulting in higher audit fees. Our findings support this prediction. We then separate strategic alliances into joint ventures and contractual alliances, as the latter involve more complexity. We find that our audit fee results are largely driven by contractual alliances. We perform additional tests to rule out the concern that our audit fee results might be attributable to the impact of strategic alliances on distress risk, audit risk, or control risk. Contrary to the distress risk argument, we find that auditors are less likely to issue going‐concern modified opinions when there is an increase in strategic alliances. Contrary to the audit risk argument, we find that an increase in strategic alliances is unrelated to the likelihood of financial misstatements. Contrary to the control risk argument, we find that an increase in strategic alliances is unrelated to internal control weakness opinions.