Thomas R. Kubick

Internal Capital and Investment: Evidence from 2012 Pension Relief

We exploit pension funding relief enacted in 2012 to estimate the effects of a positive shock to internal liquidity on market prices and investment. Measuring unexpected increases in internal liquidity using a priori expected pension contributions disclosed under FAS132R, we report positive market returns around the date of Congressional approval for financially constrained firms and find that weak institutional monitoring attenuates these returns. We estimate the likelihood firms will benefit from reductions in mandatory contributions and find that financially constrained firms increase R&D expenditures in the months following the legislation and increase capital expenditures in the year following the enactment date. Overall, we provide evidence that pension disclosures provided useful information to investors in assessing the benefits of pension relief and our results shed light on the importance of capital adjustment costs for capital expenditures vis-a-vis R&D.

Does Inside Debt Moderate Corporate Tax Avoidance

Theory suggests that inside debt held by executives in the form of deferred compensation and unfunded pensions serves to align management incentives with creditors, thereby incentivizing them to act more conservatively. Evidence in the literature suggests that creditors favor less aggressive tax avoidance strategies. Accordingly, we investigate whether the level of inside debt is associated with less corporate tax avoidance. Consistent with theoretical predictions and the high level of financial sophistication of the chief financial officer (CFO), we find that the level of inside debt for the CFO, but not chief executive officer (CEO), is associated with less tax avoidance. In addition, we find that the proximity to financial distress magnifies the inverse relation between CFO inside debt and tax avoidance. Our results are robust to numerous supplemental tests, including instrumental variables estimation and matching.

Offshore Expertise for Onshore Companies: Director Connections to Island Tax Havens and Corporate Tax Policy

Theory and recent empirical literature suggest that social and professional connections may influence corporate policy. However, inference may be biased by the possibility that firms who share peers also share unobserved characteristics that are correlated with observed policy. Using a novel identification strategy, we predict and find that director connections through well-known island tax havens have a significant effect on corporate tax policy. Specifically, we find that U.S. firms with directors who are connected to firms domiciled on the islands of the Bahamas, Bermuda, or the Caymans exhibit significantly greater tax avoidance than other U.S. firms. The presence or arrival of an island director is associated with a reduction of between one and three percentage points in the firm’s effective tax rate. We also observe a significant increase in the use of tax haven subsidiaries following the arrival of the island director. This paper was accepted by Mary Barth, accounting.

Overconfidence, CEO Awards, and Corporate Tax Aggressiveness

Theory and prior research suggest that overconfidence leads managers to overestimate their own ability to generate returns, leading to riskier corporate policies. We use a novel dataset of media awards as an exogenous shock to overconfidence to test whether award-winning CEOs adopt more aggressive corporate tax policies. Using propensity score matching and a difference-in-difference design, we find strong evidence that firms with an award-winning CEO exhibit significantly greater tax aggressiveness following the award. Overall, our results suggest that CEO overconfidence has a meaningful impact on corporate tax policy.