Luo Zuo

The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis

This paper studies accounting conservatism’s effects on firm value during the 2008 global financial crisis. Using a sample of 2,983 U.S. non-financial firms, we show that firms with more conservative financial reporting experience less negative crisis period stock returns. More conservative firms issue more debt and undertake more investment during the crisis period. We further show that the positive association between accounting conservatism and crisis period stock returns is more pronounced for firms with higher ex ante agency costs. Taken together, the evidence is consistent with accounting conservatism improving borrowing capacity, reducing underinvestment, constraining managerial opportunism, and enhancing firm value.

Relative Optimism and the Home Bias Puzzle

We study whether relative optimism leads to home bias in portfolio holdings by looking at two novel databases: a survey that includes expectations of identified professional asset management companies for equity, bonds, and currencies, and the International Monetary Fund portfolio holdings data for equity and bonds. We document that relative optimism for equity is persistent over the period 1997–2012, but relative optimism for bonds and currencies exhibits more time-series variation. Moreover, we show that relative optimism is an economically significant variable that helps explain home bias in portfolio holdings, not only for equity, but also for bonds.

Tax Planning Diffusion along the Supply Chain

We investigate the diffusion of tax planning across firms, and the real effects and sharing of benefits from such diffusion. Using supply chain relationships among firms as a possible diffusion channel, we find that tax planning spreads from principal customers to their dependent suppliers. We find that tax planning diffusion has real effects on product markets and that both parties to the tax planning diffusion share in the benefits. As tax planning diffuses to suppliers, suppliers share the tax savings with their customers by reducing the mark-up on their products. Finally, we show that tax planning diffusion is more pronounced when the customer and the supplier share a common external auditor and when they are located in the same state, suggesting that these diffusion channels complement one another.