Benjamin C. Ayers

Market assessment of industry and firm earnings information

Abstract This study examines the timing of security returns associated with industry-wide earnings and firm-specific earnings. We predict and find that returns associated with differences in performance across industries begin and end earlier than returns associated with differences in firm-specific performance within industries. To earn abnormal profits, a trading strategy based on forecasts of future earnings would require earlier predictions of industry-wide earnings than of firm-specific earnings.

Capitalization of Shareholder Taxes in Stock Prices: Evidence from the Revenue Reconciliation Act of 1993

We investigate the capitalization of shareholder-level taxes into stock values and provide evidence that capitalization of dividend taxes is influenced both by dividend policy and institutional ownership. We regress weekly abnormal stock returns surrounding the passage of the Revenue Reconciliation Act of 1993 on firm dividend yield, institutional ownership, and control variables. We document a negative stock price reaction conditioned on dividend yield during the two weeks in August, 1993, that Congress passed and President Clinton signed legislation that increased individual income tax rates. In addition, we find that the level of institutional holdings, which proxies for whether the marginal investor in a particular stock is an individual taxpayer, moderates this negative stock price reaction. These findings demonstrate that dividend tax capitalization depends upon both the expected dividend policy of the firm and the tax status of the marginal investor.

'Read My Lips...': Does the Tax Rhetoric of Presidential Candidates Affect Security Prices?

We investigate whether security prices reflect the tax rhetoric of opposing candidates during the 1992 U.S. Presidential campaign. We use daily data from the Iowa Political Stock Market to measure changes in the likelihood that the candidate advocating an increase in individual income tax rates would be elected. To isolate the effect of tax rhetoric, we examine the relations between changes in election likelihood and (a) changes in the implicit tax rate on tax-exempt bonds and (b) daily abnormal returns to dividend-yielding stocks. We find that the implicit tax rate on tax-exempt bonds increases as the election probability of the candidate advocating the tax rate increase rises. Consistent with this finding, we also report that abnormal returns for dividend-yielding stocks are negatively associated with changes in the election probability of the candidate advocating a tax increase. Moreover, this negative association decreases with the level of institutional stockholdings, a proxy for the likelihood that the marginal investor in a particular stock is not an individual. In sum, these findings suggest that security prices reflect the expected changes in future tax policy implicit in the tax rhetoric of presidential candidates as the political fortunes of the candidates change throughout the campaign.

Does Tax Deferral Enhance Firm Value

Recent research provides evidence that corporate tax departments and tax directors have incentives to reduce financial statement effective tax rates, but little or no incentive to reduce cash taxes paid. The lack of managerial incentives to reduce cash taxes paid provides a stark contrast to the benefits of tax deferral espoused by tax professionals and academics, raising the question: Does tax deferral actually enhance firm value? We examine whether the difference between financial statement tax expense and current taxes paid (i.e., current year tax deferral) is associated with a firm’s change in future profitability and market returns. We find positive associations between current year tax deferral and both the change in next period profitability and stock returns in months around the Form 10-K release date. We also find that these associations increase for firms with greater investment opportunities, financial constraints, and, to a lesser extent, strong corporate governance. These results suggest both profitability and market return benefits associated with tax deferral, consistent with tax deferral enhancing firm value.