Andrew Bird

Governance and Taxes: Evidence from Regression Discontinuity

We implement a regression discontinuity design to examine the effect of institutional ownership on tax avoidance. Positive shocks to institutional ownership around Russell index reconstitutions lead, on average, to significant decreases in effective tax rates (ETR) and prioritisation of cash over book-tax savings. They also lead to greater use of international tax planning using tax haven subsidiaries. These effects are smaller for firms with initially strong governance and high executive equity compensation, suggesting poor governance as an explanation for the undersheltering puzzle. Furthermore, we observe the largest decreases among high ETR firms, and increases for low ETR firms, consistent with institutional ownership pushing firms towards a common level of tax avoidance.

Bank Regulator Bias and the Efficacy of Stress Test Disclosures

We examine the Federal Reserves (the Fed) propensity to bias reported stress test results in the Comprehensive Capital Analysis and Review (CCAR). Using capital market responses to the CCAR, we develop and estimate a model of biased disclosure that incorporates a regulators trade-off between disciplining banks and promoting short-term stability. We find the Fed biases disclosed capital ratios upwards to prop up large banks, but downwards to discipline poorly capitalized banks. These biases have real effects on bank behavior — propped-up banks are less likely to subsequently improve their capital ratios by raising equity or cutting dividends.

Domestic Taxes and Inbound Acquisitions

US corporations face higher tax burdens than those in many other countries, potentially influencing merger and acquisition activity. A theoretical model of this process yields two testable implications: that, relative to high-tax domestic bidders, low-tax foreign bidders will specialize in both high profitability target firms and those with few tax deductions. I find support for both effects in the US acquisition market using cross-sectional variation in target profitability and industry-level variation in deductions from bonus depreciation tax reform. Counterfactual simulations show that this reform induced a large drop in foreign acquisitions and a significant loss of aggregate wealth.

Political Uncertainty and Corporate Transparency

We examine the effect of political uncertainty on corporate transparency and market quality using gubernatorial elections as a source of plausibly exogenous variation in uncertainty. Despite real activity falling in the years leading up to a close election, voluntary disclosure, measured by the frequency and content of voluntary 8-K filings and managerial guidance, increases. These effects are stronger before elections in which the incumbent has termed out or with recent party flipping, and reverse after the election. We find that political uncertainty increases trading costs and reduces analyst information production, which firms mitigate by increasing transparency.

Does the U.S. System of Taxation on Multinationals Advantage Foreign Acquirers

Prior research has documented a substantial “lockout�? effect resulting from the current U.S. worldwide tax and financial reporting systems. We hypothesize that foreign firms are tax- favored acquirers because they can avoid the U.S. tax on repatriations. Consistent with this tax advantage, we find that U.S. domiciled M&A target firms with greater locked-out earnings are more likely to be acquired by foreign than domestic acquirers. This effect is economically significant; a standard deviation increase in our proxy for locked-out earnings is associated with a 12% relative increase in the likelihood that an acquirer is foreign. As the tax advantages for a foreign firm acquiring a U.S. target with locked-out earnings are even greater when the foreign firm operates under a territorial tax system, we also compare their home country tax system. We find that foreign acquirers of U.S. target firms with locked-out earnings are indeed more likely to be residents of countries that use territorial tax systems.

Does Financial Reporting Matter? Evidence from Accounting Standards

By allowing investors to efficiently allocate capital, developed financial markets promote economic growth. We revisit a key component of financial market development, namely financial reporting standards, to identify a channel underpinning this link. We focus on introductions of new financial reporting standards and construct a novel text-based, firm-level measure of sensitivity to these standards. Relative to insensitive firms, sensitive firms reduce securities issuance by 11.4% and, despite compensating with internal sources of funds, cut investment by 10.8% after standards. These findings demonstrate that new standards trigger a substantial reallocation of capital through financial markets.We exploit firms’ voluntary disclosures as a novel firm-specific measure of ex ante sensitivity to individual FASB accounting standards to study the real effects of information regulation. We find that accounting standards impact capital allocation by increasing the cost and reducing the supply of credit and equity financing for sensitive firms. Affected firms respond by drawing down cash reserves and selling more assets compared to insensitive firms. Facing these financial constraints, affected firms cut payout by 2.6% and investment by 3.6%, on average. Our results suggest that accounting standards have economically significant real effects because they reallocate capital in financial markets. JEL Classification: G21, G28, G32, M41

Do Lenders Have Favorite Auditors

Yes. We construct a novel revealed preference measure of financial statement verification based on matching among lenders, borrowers, and auditors. When borrowers use their lenders’ preferred auditors, they borrow larger amounts and at lower rates and contracts depend more on accounting information. Lender preferences are determined by their historical experience with individual auditors; when borrowers in their loan portfolio default or restate their financials, lenders shift their loan portfolio away from the implicated auditor. These preferences impact borrowers’ post-financing auditor choices as well as subsequent matching between borrowers and lenders. Finally, when borrowers follow their lenders’ preferences, loan terms are more sensitive to financials and borrowers are less likely to default in the future. Our findings suggest that, through financial statement verification, auditors play a significant role in contracting efficiency and matching in the private loan market.

The Burden of Being Public: Evidence from Local Labor Markets

We exploit rich, cross-occupation employment data and quasi-experimental variation in IPO completion to quantify the direct labor compliance costs of being a public company. We precisely estimate a small, positive effect of public listings on local employment for compliance occupations that translates to average annual firm-level compliance costs of no higher than

Short-Termism Spillovers from the Financial Industry

1.3M. Using dynamic cross-sectional variation in the regulatory burden for public companies, we find that labor costs are highly sensitive to capital markets regulation. However, our estimates are substantially lower than self-reported compliance costs and suggest that labor costs are likely not an important determinant of listing status.

Understanding the 'Numbers Game'

To meet short-term benchmarks, lenders may alter their monitoring behavior, providing a channel for short-termism incentives to spillover into the corporate sector. We find that lenders with short-termism incentives enforce material covenant violations at abnormally high rates. Further, they are more likely to target high-quality borrowers with which they have a prior relationship and that are less financially constrained. Affected borrowers are more likely to switch lenders, receive worse loan terms on future loans, and reduce investment. Market reactions to technical default announcements when lenders have short-term incentives are 0.63% lower, suggesting that short-termism spillovers are value-decreasing.