Mark Penno

Corporate Disclosure and Operational Strategy: Financial vs. Operational Success

We introduce a simple game between two rival firms--a leader and a follower, where the leader moves first and makes an operational choice under uncertainty. The leaders disclosure of its resulting financial success or failure may in turn give the follower a competitive advantage by informing its operational choice. When this occurs, the leader reacts by sometimes making an operational choice that it knows to be less likely to produceoperational success than the alternative. This makes the financial report less useful to the follower and expectedfinancial success more likely for the leader. Alternatively, when the financial report does not provide useful information to the follower (e.g., the financial report aggregates many activities in addition to the activity the follower is interested in), it may be the follower rather than the leader who makes the choice less likely to be operationally successful. We document that when trading off operational success for financial success, the leaders aim is operational unpredictability, while the followers aim is coordination. As such, this paper highlights the intricate interplay between internal operational decisions, public inferences concerning those decisions, and different forms of success under intense competition.

The Rule-Like Attributes of Principle-Based Reporting Standards

To date, there is no precise definition of either tax aggressiveness or tax risk (Blouin, 2014). To address this, I propose a model that follows the accounting and economics literatures by considering tax avoidance (tax planning) activity to be a gray-area continuum with endpoints representing transactions with certain tax treatments. The equilibrium entails a threshold below which the tax authority does not challenge the taxpayer’s tax position. The corresponding shadow standard produces moderately aggressive ‘tax avoiders’ who take non-risky positions and ‘risk takers’ who take very aggressive risky positions, suggesting an explanation for the undersheltering puzzle and a number of other tax-related issues. I show why a less aggressive tax authority may result in less aggressive taxpayers, why the tax authority’s guidance may have little impact on risk takers’ risk choices, and why the tax authority may have an aversion to allowing the outcome of its tax challenges to become precedents for other taxpayers. The model also explains why the rules used to construct FIN 48/IAS 12 (gray area) liabilities may not produce meaningful results, and examines the role that private letter rulings (when applicable) might play in eliciting extremely aggressive behavior.