Jaron H. Wilde

Public Pressure and Corporate Tax Behavior

We use a shock to the public scrutiny of firm subsidiary locations to investigate whether that scrutiny leads to changes in firms’ disclosure and corporate tax avoidance behavior. ActionAid International, a non-profit activist group, levied public pressure on noncompliant U.K. firms in the FTSE 100 to comply with a rule requiring U.K. firms to disclose the location of all of their subsidiaries. We use this setting to examine whether the public pressure led scrutinized firms to increase their subsidiary disclosure, decrease tax avoidance, and reduce the use of subsidiaries in tax haven countries compared to other firms in the FTSE 100 not affected by the public pressure. The evidence suggests that the public scrutiny sufficiently changed the costs and benefits of tax avoidance such that tax expense increased for scrutinized firms. The results suggest that public pressure from outside activist groups can exert a significant influence on the behavior of large publicly-traded firms. Our findings extend prior research that has had little success documenting an empirical relation between public scrutiny of tax avoidance and firm behavior.

Public Pressure and Corporate Tax Behavior: PUBLIC PRESSURE AND CORPORATE TAX BEHAVIOR

We use a shock to the public scrutiny of firm subsidiary locations to investigate whether that scrutiny leads to changes in firms’ disclosure and corporate tax avoidance behavior. ActionAid International, a nonprofit activist group, levied public pressure on noncompliant U.K. firms in the FTSE 100 to comply with a rule requiring U.K. firms to disclose the location of all of their subsidiaries. We use this setting to examine whether the public pressure led scrutinized firms to increase their subsidiary disclosure, decrease tax avoidance, and reduce the use of subsidiaries in tax haven countries compared to other firms in the FTSE 100 not affected by the public pressure. The evidence suggests that the public scrutiny sufficiently changed the costs and benefits of tax avoidance such that tax expense increased for scrutinized firms. The results suggest that public pressure from outside activist groups can exert a significant influence on the behavior of large, publicly traded firms. Our findings extend prior research that has had little success documenting an empirical relation between public scrutiny of tax avoidance and firm behavior.

Pushing the future back: The impact of policy uncertainty on the market pricing of future earnings

We examine whether policy uncertainty triggered by presidential elections pushes the future back by reducing the extent to which current prices reflect information about future earnings. We estimate future earnings response coefficients (FERCs) for the years 1975-2013, a period that covers ten presidential elections. We find that FERCs are significantly lower (by 11.8 percent) during presidential election years compared to other years. Additional analyses using pseudo election years, ex-ante polls, contract prices from the Iowa Electronic Political Market, and cross-sectional firm characteristics provide corroborating evidence that the lower FERCs during election years are related to policy uncertainty. We also investigate potential explanations for the lower FERCs during election years. We find that the lower FERCs relate to forecasting difficulty rather than to changes in the discount rate or in the amount of noise trading. Finally, we find that market prices move toward future earnings to a greater degree during presidential election years compared with other years once the policy uncertainty is resolved. A trading strategy based on this drift yields significant abnormal returns. Overall, we contribute to the literature by providing the first empirical evidence that shocks to policy uncertainty influence the pricing of earnings information.

Does Managerial Sentiment Affect Accrual Estimates? Evidence from the Banking Industry

We examine whether managerial sentiment is associated with errors in accrual estimates. Using public banks we find (1) managerial sentiment is negatively associated with loan loss provision estimates, (2) future charge-offs per dollar of provision are positively associated with sentiment when the provision is estimated, and (3) the effects of sentiment are greater for firms with more uncertain charge-offs. Results are similar for private banks, suggesting accrual manipulation related to capital market incentives is unlikely to explain the results. Although economic fundamentals explain most of the variation in the provision, we find sentiment has an incremental and economically meaningful effect.

Are State Tax Amnesty Programs Associated with Financial Reporting Irregularities

This article investigates the relation between state tax amnesties and financial reporting irregularities. State tax amnesty programs, which potentially signal a lax regulatory enforcement environment, provide a unique setting in which to examine the effects of state tax authorities on non-tax financial reporting behavior. The results suggest that firms headquartered in states offering a tax amnesty program are more likely to begin engaging in a financial reporting irregularity during the amnesty period. Furthermore, the results show that the observed increase in financial reporting irregularities occurs only during periods of repeat, not initial, amnesty programs. These findings suggest state tax amnesties have previously unexplored adverse effects on managers’ behavior.

Flexible Business Models and Firms’ Financial Reporting Practices

In this study, we examine whether the flexibility in a firm’s business model (i.e., the way in which the firm manages and deploys its resources) is associated with its financial reporting practices. Recent survey evidence suggests that executives view firms’ business models as a key determinant of earnings quality. The premise underlying this study is that firms with relatively more flexible business models are more likely to achieve financial reporting objectives by taking advantage of their operational and financing flexibility rather than through accrual-based earnings management. We draw on prior research to identify attributes that are associated with flexible business models and develop a within industry, within year composite measure of the flexibility of a firm’s business model. After validating the measure, we use it to test our predictions. We find that firms with flexible business models are more likely to meet or beat analysts’ consensus forecasts, but are associated with lower discretionary accruals and a lower likelihood of financial restatements. In addition, we find that flexible business model firms are significantly more likely to use stock repurchases (but not discretionary accruals) to achieve important earning benchmarks. We contribute to the literature by highlighting that firms with flexible business models are able to exploit their operational and financing flexibility (in lieu of accrual manipulation) to meet financial reporting objectives.

Strategic Subsidiary Disclosure

We use data multinational firms provide to the Internal Revenue Service regarding their foreign subsidiary locations to explore whether some firms fail to publicly disclose subsidiaries in some countries, even when the subsidiaries are significant and should be disclosed per Security and Exchange Commission rules. The propensity to omit significant subsidiaries is especially strong when subsidiaries are in tax havens and when the firm is more highly scrutinized by the media, suggesting firms believe there are reputational costs associated with operations in tax havens. Additionally, we find evidence that firms omitting significant subsidiaries are more likely to misstate their financial results and are more likely to receive an SEC comment letter as compared to firms that do not omit significant subsidiaries. These results suggest that subsidiary omission may be indicative of firms’ broader disclosure and accounting choices.

Taking Shadow Insurance out of the Shadows: Regulatory Arbitrage, Taxes, and Capital

Recent reports highlight life insurance firms’ widespread use of shadow insurance, a complicated series of accounting techniques, to free up liquid assets typically held as reserves to pay policy claims. Aggregate shadow insurance exceeded

Investment Opportunity Sets, Operating Uncertainty, and Capital Market Pressure: Determinants of Investments in Tax Shelter Activities?

348 billion by the end of 2013, and critics contend that shadow insurance is tax-motivated and allows firms to free up cash for shareholder payouts, investment, and compensation. They argue this practice induces tremendous financial risk and puts the larger economy at risk. Proponents counter that shadow insurance offers relief from exorbitant and unnecessary capital restrictions. We examine shadow insurance firms’ behavior from three angles: corporate tax behavior, payout policy, and executive cash compensation. We find that shadow insurance arrangements are concentrated in tax haven subsidiaries and are associated with significant tax savings: a one standard deviation increase in haven (domestic) shadow insurance usage is associated with an effective tax rate reduction of 3.72 (2.67) percentage points, which equates to

Whistleblowers and Outcomes of Financial Misrepresentation Enforcement Actions

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