Less is More? Government-Imposed Resource Constraints and SEC Regulatory Outcomes (Job Market Paper)
Abstract: I study the effect of government-imposed resource constraints on the Securities and Exchange Commission (“SEC”) filing review process through the SEC’s implementation of a hiring freeze. First, I document that the hiring freeze causes a shift from full cover-to-cover reviews to limited scope reviews that use less staff time. In my primary analysis, I find that the SEC’s propensity to detect financial reporting errors increases 13-16 percent in full scope reviews in comparison to limited scope reviews, implying that the SEC improves resource allocation between review types. However, I also show that the SEC’s response is associated with detecting a lower proportion of the total restatements filed during the period (due to reviewing fewer filings), less deterrence of earnings management, and higher information asymmetry. Overall, my study suggests that government-imposed resource constraints can motivate process improvements in priority areas of regulatory agencies, but only with tradeoffs on other dimensions.
Energy Investment Tax Credits and Environmental Outcomes: Evidence from Electric Utilities with Jesse Chan
Abstract: The Investment Tax Credit (“ITC”) is an essential part of U.S. policymakers’ strategy to encourage investment in renewable energy. We assess whether firms that claim ITC are aligned with policymakers’ goals by examining electric utilities from 2001 to 2022 using a stacked cohort difference-in-differences design. First, we confirm that the ITC affects cash tax, employment, and investment patterns. However, we find that ITC firms generate 12.3% less total electricity, both from nonrenewable and renewable sources, as compared to peers who never claim an ITC. This behavior reflects ITC firms’ substitution of coal and other renewable source fuels (e.g., hydroelectric, geothermal) with solar power. We also find that although ITC usage is negatively associated with total emissions, it is positively associated with emissions per unit of electricity generated. Overall, our analyses suggest that while ITC firms may reduce emissions by displacing coal with solar power, the ITC’s design may unintentionally distort resource allocation and partially reduce emissions through decreases in economic activity.
Customer Tax Uncertainty and Supplier Investment with Tzu-Ting Chiu (NHH-Norwegian School of Economics), Pete Lisowsky, and Simone Traini (NHH-Norwegian School of Economics)
Abstract: This study examines the link between customer firms’ tax uncertainty and their supplier firms’ investment decisions. We find that customers’ tax uncertainty, proxied by current-year additions to the reserve for unrecognized tax benefits, is associated with an increased likelihood of underinvestment and a decreased likelihood of overinvestment by suppliers. This finding implies that customers’ tax uncertainty increases suppliers’ uncertainty about investment payoffs, thereby increasing (decreasing) suppliers’ tendency to underinvest (overinvest). We further document that this relation is more pronounced for suppliers with lower inventory turnover, customers with larger trade credit, customers with higher financial constraints, and customers with lower cash flow from operations. These results suggest that when suppliers are more vulnerable to cash flow disruptions, they are more concerned about risks associated with their customers’ tax uncertainty, thus motivating underinvestment. Overall, our study provides evidence on the importance of tax uncertainty to key external stakeholders of the firm—suppliers.
Tax Surprises with Erik Beardsley (University of Illinois), Michael Donohoe (University of Illinois) and Pete Lisowsky
This study examines how corporate tax departments are evaluated using an interview-based approach.