Research

"The Effect of Tax-Motivated Income Shifting on Information Asymmetry"  with Ciao-Wei Chen, Phil Quinn, and Ryan Wilson (Conditionally accepted to Review of Accounting Studies)

Abstract: We examine whether tax-motivated income shifting by U.S. multinational corporations affects information asymmetry. Using a new firm-year measure of income shifting and a two-stage least squares approach, we find income shifting is positively associated with four measures of information asymmetry. Cross-sectional tests reveal that the effect of income shifting on information asymmetry is more pronounced for firms with large differences between foreign and domestic earnings growth. Using SFAS 131 to improve identification and establish evidence consistent with a causal relation between income shifting and information asymmetry, we demonstrate that the negative impact of income shifting on information asymmetry is concentrated in firms that discontinue geographic earnings disclosures. Overall, our study provides evidence that significant consequences of information asymmetry are associated with tax-motivated income shifting.

"Real Consequences of Tax-Motivated Income Shifting: Evidence from Shadow Insurers" with Jaron Wilde and Ryan Wilson

Abstract: Tax-motivated income shifting is an escalating concern among policymakers worldwide and a growing area of academic interest. However, we have a limited understanding of the real consequences of the practice. We study one set of consequences using a sample of firms engaged in shadow insurance, a complicated series of transactions designed to free liquid assets typically held to pay life insurance claims. Shadow insurance, which exceeded $354 billion in aggregate at the end of 2013, ostensibly offers relief from unnecessary capital restrictions. However, critics argue it is tax-motivated, resembles the activities leading up to the 2007–2009 financial crisis, and poses risks to the larger economy. Consistent with a tax motivation, we find that five out of every six dollars of shadow insurance are located in tax havens and shadow insurance exhibits economically significant tax savings. We also find that firms using shadow insurance have significantly higher credit default risk and hold considerably lower levels of liquid assets but make significantly greater payouts to shareholders and executives. Taken together, our findings highlight significant consequences to a growing and economically important tax-motivated practice.


"
Assessing the Construct Validity of Accounting Proxies: 
Evidence from Returns-Based Measures of Conditional Conservatism" with Cristi Gleason, Bruce Johnson, and Sam Melessa

Abstract: We propose and demonstrate a method for validating proxies for accounting constructs. The method consists of identifying observations influential in generating an empirical result of interest and determining whether those observations exhibit accounting attributes consistent with theory. We demonstrate the method by assessing the validity of the Basu (1997) differential timeliness (DT) coefficient and the Lawrence et al. (2017) modified DT coefficient. Results indicate influential observations exhibit some attributes predicted by conditional conservatism. However, controlling for economic news, influential observations are characterized by poorer operating performance and exhibit an accrual-cash flow relation inconsistent with conditional conservatism. For the Basu (1997) model, characteristics inconsistent with conservatism are better able to discriminate influential from non-influential observations than characteristics consistent with conservatism, whereas the opposite result holds for the Lawrence et al. (2017) model. Overall, the evidence favors the Lawrence et al. (2017) modification in capturing the theoretically predicted accounting attributes.

Job Market Paper (based on Dissertation): "A Closer Examination of the Book-Tax Difference Pricing Anomaly"

Abstract: In this study, I examine whether the pricing of book-tax differences reflects mispricing or a priced risk factor. I provide new evidence that temporary book-tax differences are mispriced by developing portfolios that trade on the information in book-tax differences for future accruals and cash flows. I develop and test predictions on whether book-tax difference mispricing is the value-glamour anomaly in disguise. Both signals of mispricing relate to firm growth and, thus, both may capture mispricing due to over-extrapolation of realized growth to future growth. I find that the book-tax difference pricing anomaly is subsumed by the value-glamour anomaly. Specifically, trading on the information in book-tax differences does not yield incremental returns relative to a value-glamour trading strategy. Hence, mispricing associated with book-tax differences relates more generally to the mispricing of expected growth as extrapolated from past growth.