Michael A. Mayberry

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.

Taxes, Competition, and Organizational Form

This study examines whether competition from tax-advantaged firms influences the organizational form choice of tax-disadvantaged firms, and explores two consequences of this choice. Using a sample of 5,268 predominantly private commercial U.S. banks during 1997-2010, we find that greater competition from S corporation banks, which are subject to one layer of income tax, increases the likelihood that rival C corporation banks, which are subject to two layers of income tax, convert to S status. We estimate that the aggregate first-year tax savings from conversion exceed

Product Market Power and Tax Avoidance: Market Leaders, Mimicking Strategies, and Stock Returns

267 million. In terms of consequences, converting banks increase their market share more than non-converting banks, with advertising growth and new bank branches facilitating this increase, while non-converting banks increase their tax avoidance. Our findings provide economic insight into how competition shapes — and is shaped by — taxes and organizational form.