"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 (The Accounting Review, July 2020, Volume 95, Issue 4, pp. 219–262)
Abstract: Using the shadow insurance setting, we study the interplay between tax and nontax incentives in income shifting. Shadow insurance involves intercompany transactions designed to help firms meet regulatory capital requirements. However, prior to the Tax Cuts and Jobs Act of 2017 (TCJA), foreign-owned life insurance firms could save taxes by using shadow insurance to shift U.S. profits to tax havens. Consistent with expectations, we find that, while nontax incentives appear to be the dominant factor behind firms' use of shadow insurance, tax considerations also played a role for certain firms. We also find shadow insurance is associated with lower liquid asset holdings and increased credit risk. Overall, our results suggest taxes were an important incentive for foreign-owned life insurance firms to use shadow insurance pre-TCJA. Moreover, in this setting, nontax considerations appeared to have motivated U.S.-owned firms' use of tax havens.
"What Matters for In-House Tax Planning: Tax Function Power and Status" with Matt Ege and John Robinson (The Accounting Review, forthcoming)
Abstract: Social hierarchy theory predicts that the power and status of an organizational function have a first-order effect on the function’s ability to influence outcomes. We find that the rank of the title of the top tax executive is positively associated with tax planning after controlling for treatment effects. Our inferences remain when (1) using changes in the size of the c-suite as a shock to the relative power and status of the tax function and (2) examining promotions and demotions in title rank. Point estimates suggest that tax function power and status are up to 2.6 times as important as tax planning resources, up to 4.0 times as important as tax function-specific expertise, and more often than not more important than manager fixed effects. Overall, results suggest that the power and status of the tax function is often what matters most in determining tax outcomes.
"Are Book-Tax Differences Mispriced?" (Revising for 2nd round submission to The Accounting Review)
Abstract: I examine whether book-tax differences (BTDs) are mispriced. Using time-series asset pricing tests, I provide evidence of hedge returns to trading on BTDs consistent with prior evidence from security-level return predictability tests. BTDs are a function of accruals and growth, so I consider whether BTD mispricing is accrual and growth mispricing, two economically significant asset pricing anomalies. Using operating cash flows-to-price (CFO/P), which jointly captures accrual and growth mispricing, I provide consistent evidence that the returns to trading on BTDs are subsumed by the returns to trading on CFO/P. My findings suggest that BTD mispricing is the accrual and growth anomalies in disguise, rather than a distinct anomaly. Overall, the evidence casts doubt on the ability of BTDs to provide unique, unpriced information for future earnings and their usefulness as a mispricing signal. This study provides useful evidence to investors and informs calls for additional tax-related disclosures.
"A New Method for Assessing the Construct Validity of Accounting Measures: Looking Where the Action Is" with Cristi Gleason, Bruce Johnson, and Sam Melessa (Under 1st round review)
Abstract: We propose and demonstrate a new method for validating proxies for accounting constructs. Our method consists of first identifying high-value observations, which are those statistically most responsible for generating a coefficient of interest, and second determining whether those observations exhibit accounting attributes consistent with theory. This method allows researchers to validate proxies for key theoretical constructs by testing whether high-value observations contain the accounting attributes implied by the theory and lack attributes that run counter to the theory. The method allows researchers to identify potentially confounding factors and to tackle alternative explanations for primary results. We demonstrate the method by assessing the validity of two measures for conditional accounting conservatism. However, the method applies generally to large-sample settings and is flexible in its application to key coefficients. We also demonstrate how researchers can compare alternative measures of the same construct to select the best measure for their research context.
High-value observations in Returns-Earnings Scatterplot (1962-2012)