Does Tax Planning Affect Analysts' Forecast Accuracy?

We investigate whether firms' tax planning affects the accuracy of analysts' forecasts. Tax planning can exacerbate the complexity of firms' operations through strategic choices to exploit tax laws. Because of its effect on firms' operations, tax planning can influence analysts' efforts to understand and forecast earnings. Specifically, if the additional complexity arising from tax planning makes firm attributes less representative of expected earnings, analysts may issue less accurate forecasts. Using auditor‐provided tax services (APTS) as a measure of tax planning, we find that, as firms spend more on tax planning, the accuracy of analysts' forecasts of both earnings per share and tax expense declines. We also document that firms with higher levels of APTS have greater year‐to‐year volatility in, and lower persistence of, effective tax rates and earnings. Our results suggest that increased firm complexity, due to greater tax planning, makes earnings and tax expense more difficult to forecast and that analysts do not properly adjust for these effects. Thus, when deciding to engage in tax planning, firms appear to make trade‐offs between potential tax savings and negative effects on earnings properties and analysts' forecasts.     

Trent J. MacDonald,The Political Economy of Non-Territorial Exit: Cryptosecession. Northampton: Edward Elgar, 2019. x + 233 pages. USD 125.00 (hardback)

The Review of Austrian Economics -     

For Better or worse: Organizational turnaround in New York City schools

The performance of public organizations has become a more salient issue as the popularity of accountability policies has grown. Though organizations are often defined as underperforming, little is known about the effectiveness of various strategies commonly recommended for agency turnaround. This study provides a large-N test of three common categories of turnaround mechanisms – retrenchment, repositioning, and reorganization – in nearly 300 failing New York City schools between 2008 and 2011. Models show that none of the three turnaround strategies appear to be significantly associated with improvements in core organizational performance from an administrative perspective, although repositioning appears to improve client satisfaction.     

Capital flight from the countries in transition: Some empirical evidence

This paper presents empirical evidence suggesting that the transition economies have tended to experience capital flight during periods of macroeconomic instability, such as high inflation and sharply declining output. The timing of these outflows, however, has differed somewhat across countries. Poland and Czechoslovakia experienced significant capital flight early in the transition process, but as reforms have progressed, capital outflows have slowed. By contrast, Russia registered a relatively steady flow of capital flight from 1991-94, with cumulative outflows totalling about $40 billion. Finally, capital flight from Hungary has been subdued, paralleling the gradual course of economic reforms and the country's comparative political stability.     

Business Strategy,Financial Reporting Irregularities,and Audit Effort

This study examines whether clients' business strategies are a factor in determining the occurrence of financial reporting irregularities and the level of audit effort. We use the organizational strategy theory of Miles and Snow to develop a comprehensive measure of business strategy using publicly available data. We find that Miles and Snow's Prospector strategy is more likely to be involved in financial reporting irregularities and generally requires greater audit effort. The business strategy measure also appears to capture client business risk and provides incremental explanatory power beyond the individual measures of client complexity or risk used in traditional audit fee models. We contribute to the literature by constructing a replicable business strategy measure and identifying organizational business strategy as an important ex ante determinant of financial reporting irregularities and levels of audit effort. Our results suggest that investigating how audits can be improved to reduce financial reporting irregularities among Prospector clients is an important area for audit practice and future research.     

HARSH NORMS AND SCREENING FOR LOYALTY

Norms that restrict choice sets or impose otherwise harsh requirements would seem to act as barriers to group formation by raising the costs of adherence to potential and continuing members. Contrary to that intuition, one observes a broad range of group norms in the real world that impose large costs on group members. Iannaccone provides a rationale for harsh norms as a mechanism to reduce free‐riding in supplying a club good. This paper proposes a new rationalization for harsh group norms as a mechanism under which harsh norms serve to screen out disloyal members, providing what is essentially a technology for measuring loyalty in environments where group leaders cannot reliably measure group members' loyalty. The model demonstrates that loyalty can be signalled through acts that are seemingly irrelevant to the group's core objectives and identity.     

Policy Uncertainty about Australia's Carbon Price: Expert Survey Results and Implications for Investment

Australia's carbon‐pricing policy remains in doubt due to a lack of bipartisan political support. A survey of Australian‐based carbon‐pricing experts demonstrates profound policy uncertainty: 40 per cent of respondents expect the current carbon‐pricing mechanism to be repealed, but 80 per cent expect that there will be a carbon price in 2020. The forward price curve is U‐shaped and has great variance, with the 60 per cent confidence interval spanning from zero to A$25/t in 2020. Carbon policy uncertainty causes large excess costs in Australia's energy sector and may result in delay and diversion of investment.     

GNP and military mobilization

The remarkable shift from a limping United States recovery from the Great Depression of the 1930's to the relatively rapid and immensely successful World War II mobilization of the 1940's was far from an easy and orderly transition. The first official national income estimates in the United States were prepared in 1933 and were valuable in monitoring the recovery programs. They were especially helpful in determining the maximum potential resources for the wartime mobilization. This information was essential in setting goals that were both ambitious and feasible. Many difficulties were encountered in a feasibility dispute between civilian and military organizations and leaders. Changes in personnel, reorganizations and top level coordination led to massive production of armaments and truly making the United States the Arsenal for Democracy.     

Capabilities,technologies, and firm exit during industry shakeout: Evidence from the global solar photovoltaic industry

Research Summary: Explanations of entrants’ survival in an emerging industry are premised on pre‐entry capabilities or technology entry choices prior to the emergence of the dominant design. We consider how these drivers interact to strengthen or nullify firms’ pre‐entry advantage, and facilitate adaptation as the industry evolves. We also expand the treatment of exit by separating dissolution from acquisition, in which firms’ capabilities continue to be utilized in the industry. Studying a recent shakeout in the global solar photovoltaic industry, we find that pre‐entry capabilities and technology choices act in a complementary manner for some firms, thereby enhancing survival, and as buffers against exit for others. Nearly half of exits were via acquisitions, and technology choice at entry played an important role in determining how firms exited. Managerial Summary: New industries are often characterized by intense technology competition that culminates in a dominant technology followed by industry shakeout. Although prior research underscores the central role of technology choice and firm capabilities to survival, we do not actually know how firms with different capabilities and who have made competing technology choices survive an industry shakeout. In this article, we show how entrants’ capabilities and technology choices can act in a complementary manner for some firms, enhancing their chance of survival, and as buffers against failure for others. Moreover, we explain why some firms that do exit are acquired, when others are dissolved.