Corporate tax aggressiveness,outside directors,and debt policy: An empirical analysis

This study examines the influence of corporate tax aggressiveness on corporate debt policy (the debt-substitution effect) and the influence of outside directors on both debt and the debt-substitution effect. Based on a sample of 6967 firm-year observations over the 2001–2010 period, we find that tax aggressiveness is negatively correlated with debt. We also observe a negative correlation between debt and the proportion of outside directors on the board, and find that outside directors magnify the debt-substitution effect. Finally, we obtain similar results in analysis based on firms' debt issuance decisions.     

Disclosure “Bunching”

This paper studies managers' preferences among information acquisition and disclosure policies when their firms are required to engage in “real‐time” or “continuous” financial reporting. The paper predicts that for many, but not all, processes describing the distribution of their firms' cash flows, when subject to such reporting requirements, managers will engage in disclosure “bunching,” that is, they will bunch the discretionary component of the information they acquire and disclose into a single point in time rather than spread the acquisition and disclosure of that information over time. We show that managers' preferred bunching period depends on managers' strategy for trading in their firms' shares, managers' risk aversion, the risk premium the capital market attaches to firms' shares, and the size of managers' initial ownership stakes in their firms. We also study and characterize how the equilibrium prices of firms' shares vary over time and also how managers' optimal trading strategies vary with their most preferred “bunching” strategies. Several extensions confirm the robustness of the optimality of disclosure “bunching.”     

Institutional shareholder services' proxy voting guidelines and ROE management

We examine the impact of the Institutional Shareholder Services (ISS) proxy voting guidelines on managers' opportunistic reporting behaviours. In February 2015, the ISS introduced a new advisory policy based on firms' return on equity (ROE) and started to issue negative recommendations for top executive election in firms whose past average and most recent ROE are lower than 5%. We find that managers are more likely to achieve the 5% ROE after implementing the policy, and they do so by discretionary activities. Our findings imply that accounting-based guidelines issued by a proxy voting advisor can generate managers' incentives for opportunistic reporting.     

Corporate governance and the information environment: Evidence from state antitakeover laws

We examine the relation between corporate governance and firms' information environments. We use the passage of state antitakeover laws in the U.S. as a source of exogenous variation in an important governance mechanism to identify changes in firms' information environments. We find that information asymmetry and private information gathering decreased and that financial statement informativeness increased following the passage of the antitakeover laws. Cross-sectional analyses indicate that the increased level of financial statement informativeness is attributable to firms that are most likely to access equity markets rather than managerial entrenchment, managerial career concerns, or managers' pursuit of the quiet life.     

For whom (and for when) is the firm governed? The effect of changes in corporate fiduciary duties on tax strategies and earnings management

The proper object of the fiduciary duties of corporate directors and officers is frequently described as the central question in all corporate law. We use the adoption of constituency statutes, which shift the loci of corporate managers' duties from shareholders to a wide range of stakeholders, as a quasi-natural experiment to determine the actual impact of fiduciary duties. We find that though the adoption of constituency statutes has no significant effect on measures of earnings management, it has a robust effect on firms' effective tax rate, which increases in a range between 0.570% and 1.903%. These results are robust in terms of various measures of the firm's effective tax rate. We provide explanations for why fiduciary duties apparently do not influence manager behaviours in relation to shareholders but do affect their behaviours in relation to the taxing authority. We argue that a change to fiduciary duties does not appear to alter the motivation of managers to maximize shareholder welfare outcomes, but rather it allows them to eschew short-term strategies that often impair long-term outcomes.     

Do personal taxes affect capital structure? Evidence from the 2003 tax cut

Because the personal tax treatments of interest and dividend income likely affect the relative cost of debt and equity financing, a sharp change in tax treatment could affect firms' optimal leverage. This paper examines the effect of the 2003 equity income tax cut on firms' debt usage. Because this tax cut affected only individual investors, we can use a difference-in-differences method to identify the effect of personal tax on firms' leverage. Previous research has found that the 2003 tax cut encouraged dividend payouts and reduced the cost of equity, but it provides no link to equilibrium leverage ratios. We estimate that the tax cut causes the affected firms' leverage to decrease by about 5 percentage points. Furthermore, we show that the effects of the tax cut are stronger for firms with lower marginal corporate tax rates and for firms that are not financially constrained, consistent with our theoretical predictions. Overall, we find strong evidence that personal tax is an important determinant of firms' optimal leverage.     

Do corporate tax cuts increase investments?

This paper studies the effect of corporate taxes on investment. Since firms with a foreign parent have more cross-country profit shifting opportunities than domestically owned firms do, their effective tax rate and, consequently, their tax-induced costs to investment are lower. We therefore expect capital investment responses to a corporate tax cut to be heterogeneous across firms. Using firm-level data on German corporations, we exploit the 2008 tax reform, which substantially cut corporate taxes as an exogenous policy shock and expect domestically owned firms' investments to be more responsive to the reform. We show exactly this in a difference-in-differences setting. We find that the reduction in corporate tax payments led to a one-to-one increase in the real investments of domestic firms. The effect is stronger for domestic firms relying more on internal funds. Correspondingly, labor investment increased more for domestic firms, ensuring a constant mix of input factors. In addition, we show that domestic firms' sales grew faster after the tax cut than the sales of foreign-owned firms. Our results imply that corporate tax changes can increase corporate investment but that domestic firms benefit more than foreign-owned firms from a tax cut through higher investment responses resulting in greater sales growth.     

Directors with foreign experience and corporate tax avoidance

Using a large sample of hand-collected directors' foreign experience data for Chinese listed companies from 2001 to 2016, we examine the impact of directors with foreign experience on corporate tax avoidance. We find a significantly negative association between directors with foreign experience and tax avoidance, suggesting that these directors can help constrain their firms' tax aggressiveness. The result is robust to Heckman two-stage analysis, instrumental variable approach, inclusion of potential omitted variables, change analysis, and alternative tax avoidance measures. Further analyses reveal that reputation concerns and CSR awareness are potential channels through which returnee directors affect corporate tax avoidance. The negative relation between directors with foreign experience and tax avoidance only holds when directors' foreign experiences are derived from countries or regions with higher investor protections. Non-independent directors with foreign experience have larger impacts on corporate tax avoidance than independent directors, and the effect is more pronounced when directors with foreign experience sit on audit committees. Directors' working and studying experiences both have important impacts on corporate tax avoidance. The result also suggests that the negative relation between directors with foreign experience and tax avoidance is more pronounced in non-state-owned firms. Overall, the findings suggest that directors' foreign experience matters for corporate tax behavior in emerging markets.     

Do corporate press releases drive media coverage?

We examine the role of voluntary corporate press releases about firms' financial performance as a stimulus for financial media coverage. We find that there is a spike of media articles on the same day and one trading day following firms' press releases. We provide evidence that managers compete for media attention and can use voluntary press releases to increase their firms' media coverage; a firm's issuance of press releases attracts more media articles about the firm leading to greater abnormal returns and trading volumes. Our results are robust to controlling for firm characteristics, different model specifications as well as regular earnings announcements, which have been the focus of prior literature. We also show that our inferences are not sensitive to managers' duty to disclose material information to investors. Collectively, our findings suggest that media coverage decisions can be influenced by a firm.     

Firm-level political sentiment and corporate tax avoidance

This paper examines how managers' tone on political issues in earnings conference calls relates to corporate tax avoidance. We find a positive relationship between managers' tone of using political linguistics and tax avoidance, while controlling for non-political tone. The relationship is more pronounced for firms with greater political exposure, higher lobbying expenditures, greater information asymmetry, and more risk-taking. The empirical results remain robust with various additional checks. Overall, our evidence suggests that managers employ the sentiment of political risk disclosure for aggressive tax purposes.     

Accounting Discretion in Fair Value Estimates: An Examination of SFAS 142 Goodwill Impairments

This study examines Statement of Financial Accounting Standards 142 adoption decisions, focusing on the trade‐off between recording certain current goodwill impairment charges below the line and uncertain future impairment charges included in income from continuing operations. We examine several potentially important economic incentives that firms face when making this accounting choice. We find evidence suggesting that firms' equity market concerns affect their preference for above‐the‐line vs. below‐the‐line accounting treatment, and firms' debt contracting, bonus, turnover, and exchange delisting incentives affect their decisions to accelerate or delay expense recognition. Our study contributes to the accounting choice literature by examining managers' use of discretion when adopting a mandatory accounting change and by developing and testing explicit cross‐sectional hypotheses of the determinants of firms' preferences for immediate below‐the‐line versus delayed above‐the‐line expense recognition.     

The Role of Supplementary Statements with Management Earnings Forecasts

We investigate managers' decisions to supplement their firms' management earnings forecasts. We classify these supplementary disclosures as qualitative “soft talk” disclosures or verifiable forward‐looking statements. We find that managers provide soft talk disclosures with similar frequency for good and bad news forecasts but are more likely to supplement good news forecasts with verifiable forward‐looking statements. We examine the market response to these forecasts and find that bad news earnings forecasts are always informative but that good news forecasts are informative only when supplemented by verifiable forward‐looking statements, supporting our argument that these statements bolster the credibility of good news forecasts.     

Firms' Off-Balance Sheet and Hybrid Debt Financing: Evidence from Their Book-Tax Reporting Differences

We match large U.S. corporations' tax returns during 1989–2001 to their financial statements to construct a firm‐level proxy of firms' use of off‐balance sheet and hybrid debt financing. We find that firms with less favorable prior‐period Standard & Poor's (S&P) bond ratings or higher leverage ratios in comparison to their industry report greater amounts of interest expense on their tax returns than to investors and creditors on their financial statements. These between‐firm results are consistent with credit‐constrained firms using more structured financing arrangements. Our within‐firm tests also suggest that firms use more structured financing arrangements when they enter into contractual loan agreements that provide incentives to manage debt ratings. Specifically, we find that after controlling for S&P bond rating and industry‐adjusted leverage, our sample firms report greater amounts of interest expenses for tax than for financial statement purposes when they enter into performance pricing contracts that use senior debt rating covenants to set interest rates. Furthermore, we find that the greatest book‐tax reporting changes occur when firms become closer to violating these debt rating covenants. These latter findings are consistent with firms' contractual debt covenants influencing their use of off‐balance sheet and hybrid debt financing.     

Are Multinational Corporate Tax Rules as Important as Tax Rates?

Previous research has documented the influence of statutory tax rates on international firms' effective tax rates, or ETRs. We add to this body of research by examining common factors of the income tax base, which affects ETRs. Specifically, this study examines the determinants of effective tax rates for publicly traded companies based in European Union (EU) countries. The time period examined is after 2004, when all EU firms were required to use standardized accounting principles under International Financial Reporting Standards (IFRS). We find that, across EU countries, such factors are relatively consistent with factors found in studies of U.S. companies' effective tax rates, which include inventory, leverage, depreciation tax shield, and R&D intensity. We also find that the presence of country book-tax conformity rules increases effective rates. Importantly, our finding that such tax base (or rule) effects are at least as important as rate effects adds to the international debate about uneven tax structures around the globe.     

An examination of firms’ responses to tax forgiveness

This study uses state tax amnesties to examine how firms respond to forgiveness—particularly repeated forgiveness—by a taxing authority. We posit that tax forgiveness programs alter taxpayer perceptions of the probability of detection by enforcers or the probability of future forgiveness programs, either of which could affect future tax aggressiveness. We find that firms headquartered in an amnesty-granting state increase state income tax aggressiveness following the first instance of tax amnesty, relative to control firms in other states. Moreover, we find evidence that tax aggressiveness incrementally increases with each additional repetition of a tax amnesty. Finally, we find that the effect of amnesties on tax aggressiveness is more prominent for small firms, which face less scrutiny and for which the tax aggressiveness measures are less confounded. Our findings suggest that repeated programs of tax forgiveness have increasingly negative implications for corporate tax collections.     

Opportunistic earnings management or performance-related effects? Evidence from dividend-paying firms

We propose that much of the variation in standard (accruals and real-activities) earnings management metrics can be explained by firms' performance trajectories. We test our proposition using dividend change to distinguish high from low performance trajectory firms. We find that standard earnings management metrics have a stronger relation with performance trajectories than with unexpected earnings, a presumed target of earnings management. Firms that appear to manage earnings more are likelier to increase their dividends, but standard earnings management metrics do not explain changes in firm value around dividend change announcements. Applying standard earnings management metrics without taking performance trajectories into account can result in mistaking managers' efforts to increase firm value for earnings management.     

Dare to play with fire? Managerial ability and the use of short-term debt

This study documents a positive relation between managerial ability and the use of short-term debt. This finding is robust to various specifications, including a difference-in-difference approach based on CEO turnovers. Able managers' preferences for short-term debt are amplified for firms with greater growth opportunities and are attenuated by firms' refinancing risk. Additional analyses shed light on the implications of high-ability managers' strategic use of short-term debt. Overall, the results presented in this study demonstrate that managers' innate ability plays a critical role in shaping corporate debt maturity structure.     

Financial distress,outside directors and corporate tax aggressiveness spanning the global financial crisis: An empirical analysis

We examine financial distress and tax aggressiveness spanning the global financial crisis (GFC) of 2008 and the impact of the interaction between board independence and firm-specific financial distress on tax aggressiveness. Our regression results show that both financial distress and the GFC are positively associated with tax aggressiveness. More importantly, we find that the positive association between financial distress and tax aggressiveness is magnified by the GFC. We also observe that the interaction between board independence and financial distress is positively associated with tax aggressiveness. Our results are robust to multiple measures of financial distress and tax aggressiveness.     

Minority shareholders' activism and stock price crash risk: Evidence from China

This study investigates the effect of minority shareholders' activism on stock price crash risk in the Chinese stock market. Using a novel dataset on minority shareholders' attendance at annual general meetings (AGMs), we find that minority shareholders' attendance, especially the onsite attendance, significantly exacerbates firms' future crash risk. The results are robust to instrumental variable approach, placebo tests, and alternative measures of minority shareholders' attendance and crash risk. We also find three channels: incremental analyst following, media coverage and retail attention, all of which expand market pressure and exacerbate managers' incentives to withhold bad news. Extended analyses show that the impact of minority shareholders' attendance is less pronounced among firms with better investor protection. Overall, our findings are helpful to understand the importance of minority shareholders' activism and its unintended consequences on stock market in the emerging economies.     

A positive analysis of labor-market institutions and tax reforms

In this paper, we investigate the structure of the “Laffer curve” for taxes on labor and other factors of production, under different institutional frameworks of the labor market. Using a Cobb–Douglas production technology allows us to characterize important properties of the “Laffer curve” in terms of the wage share for a competitive labor market, the monopoly union model, the right-to-manage approach, the insider-dominated union, and efficient Nash bargains simultaneously. In this way, we are able to highlight the menu of factor tax systems, and thus of potential tax reforms available to a government, without perfect knowledge of the mechanism of the labor market. In particular, we show that the employment-maximizing tax system features a constant energy tax, while the energy mini-/maximizing tax system features a constant labor tax. We also illuminate to what extent these results must be modified if we either employ a CES production function, or if we allow for an endogenous reservation wage.