Research

"The Effect of Tax-Motivated Income Shifting on Information Asymmetry"  with Ciao-Wei Chen, Phil Quinn, and Ryan Wilson (Review of Accounting Studies, September 2018, Volume 23, Issue 3, pp 958–1004)

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.

"Tax and Nontax Incentives in Income Shifting: Evidence from Shadow Insurers" with Jaron Wilde and Ryan Wilson (Under 3rd round review)

Abstract: Income shifting is a significant concern among policymakers worldwide and a growing area of academic interest. We use the “shadow insurance” setting to study the interplay between tax and nontax incentives in income shifting. Shadow insurance involves intercompany transactions ostensibly designed to help firms meet regulatory capital requirements. We argue that prior to the Tax Cuts and Jobs Act of 2017 (TCJA), foreign owned life insurance firms could use it to shift their U.S. profits to tax havens and save taxes. We find that although nontax incentives appear to be the dominant factor behind firms’ use of shadow insurance, tax considerations also played a significant role for certain firms. While our collective results suggest that taxes provided an important additional incentive for foreign owned life insurance firms to utilize shadow insurance, our study also highlights that nontax considerations appear to motivate U.S. owned firms’ use of tax havens.

"Using Influential Observations to Assess the Construct Validity of Accounting Measures" with Cristi Gleason, Bruce Johnson, and Sam Melessa (Under initial review)

Abstract: Given the importance of evaluating construct validity using multiple independent approaches, we propose and demonstrate a new method for validating proxies for accounting constructs. The method consists of identifying the observations most influential in generating an empirical result of interest and determining whether those observations exhibit accounting attributes consistent with theory. Our method applies to large sample settings, is flexible, and allows researchers to identify and eliminate potentially confounding factors. We demonstrate the method by assessing the validity of the Basu (1997) differential timeliness (DT) coefficient and the Lawrence, Sloan, and Sun (2018) modification of the DT coefficient for business curtailments. We show how researchers can compare alternative measures of the same construct to select the most appropriate measure for their research context.

"A Re-Examination of the Book-Tax Difference Pricing Anomaly"

Abstract: This study re-examines the mispricing of book-tax differences (BTDs). I provide evidence using multifactor time-series asset pricing tests that investors can generate abnormal returns trading on temporary BTDs, consistent with prior evidence. However, the abnormal returns to a BTD trading strategy are subsumed by the cash flow-to-price (CFO/P) anomaly. Specifically, hedge-control portfolio tests indicate that trading on BTDs does not yield incremental returns relative to trading on CFO/P, whereas trading on CFO/P does generate incremental returns to trading on BTDs. Viewing the pricing of BTDs in isolation, prior research concludes that BTDs contain information for future earnings, accruals, and cash flows that is not fully reflected in stock prices. My results suggest these findings omit an important correlated variable, CFO/P, which jointly captures accrual and value-glamour mispricing. Overall, my evidence casts doubt on the usefulness of BTDs as a mispricing signal, suggests that the BTD pricing anomaly is a subset of the broader CFO/P anomaly, and tempers calls in the literature for added mandatory tax disclosures and book-to-taxable income reconciliations.


Abstract: Social hierarchy theory predicts that the power and status of an organizational function affect the influence of the function. We test this theory using the tax function and find that the rank of the title of the top tax executive is positively associated with tax function influence, as captured through multiple measures of tax planning and through tax internal control quality. Using changes in the size of the c-suite as a shock to the relative power and status of the tax function compared to other functions, we find evidence of decreasing (increasing) influence when there are c-suite expansions (contractions). We also find evidence that influence increases (decreases) with promotions (demotions) in title rank. Our point estimates suggest that the position of the tax function within the organization is up to 1.8 times as important as investment in tax planning resources.