Accounting Theses and Dissertations

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Open Access
Accounting disclosure quality and synergy gains: Evidence from cross-border mergers and acquisitions
(University of Oregon, 2009-06) Eiler, Lisa Ann
In this dissertation, I investigate how cross-country differences in regulatory environments affect the value and distribution of gains in cross-border acquisitions. I focus on how pre-acquisition strategies to reduce the valuation discount arising from weak regulatory environments affect the value and distribution of gains between acquiring and target firms. The two specific strategies I examine are cross-listing and voluntarily adopting International Financial Reporting Standards (IFRS). I compare the value and distribution of synergy gains for target firms from weak regulatory environments that have cross-listed or adopted IFRS (i.e., "strategic firms") to (1) target firms in similar countries that have not done so (i.e., "non-strategic firms") and (2) target firms in strong regulatory environment countries. For the first group, I expect lower total synergy gains and merger premia in acquisitions involving strategic target firms. However, I expect higher total valuation gains (i.e., the merger premium plus the increase in value from the strategy) for strategic firms. For the second comparison group, I expect higher total synergy gains and merger premia in acquisitions involving strategic firms relative to firms from strong regulatory environments. I test my predictions on a sample of cross-border acquisitions completed in 26 countries between 1995-2007. In acquisitions involving target firms from weak regulatory environments, I find no evidence that either the total synergy gain or merger premium are smaller for strategic firms. In fact, I find some evidence that the total synergy gains are higher for strategic firms relative to non-strategic firms. I find some evidence of higher total valuation gains for cross-listed firms, consistent with my hypothesis. For the second comparison group, I find no evidence that either the total synergy gain or merger premium are higher for strategic firms. By examining cross-border acquisitions, my research provides evidence on an increasingly important and economically significant type of foreign direct investment. I relate literature investigating the determinants and distribution of merger synergies to literature analyzing methods to eliminate cross-country valuation discounts. Therefore, my research makes an important contribution by providing insights beyond identifying which party captures synergy gains in cross-border acquisitions.
Open Access
Are Critics Right About Quarterly Earnings Guidance? An Examination of Quarterly Earnings Guidance and Managerial Myopia
(University of Oregon, 2020-09-24) Quinto, Claire; Matsunaga, Steven
I examine the claim that managers who issue quarterly earnings guidance sacrifice long-term value to enhance short-term performance, i.e., that quarterly earnings guidance encourages myopic behavior. I find that quarterly guiders are more likely to meet quarterly earnings expectations and tend to use more short-term language in their corporate disclosures, supporting the view that quarterly earnings guidance shifts a manager’s attention to the short term. However, quarterly earnings guidance does not appear to have a negative impact on a firm’s long-term performance. Using an entropy-balanced sample, I find that quarterly guiders outperform non-guiders over the next three and five years across a variety of performance measures. Also inconsistent with the claims of critics, I find no evidence that quarterly earnings guidance is associated with more earnings management or underinvestment. Taken together, my results do not support the view that quarterly earnings guidance leads to managerial myopia. Instead, it appears that among the firms that choose to provide it, the benefits of quarterly earnings guidance outweigh the costs.
Open Access
Audit committee accounting expertise and changes in financial reporting quality
(University of Oregon, 2009-06) Rich, Kevin T.
In this dissertation,I examine whether financial reporting quality increases following the appointment of an accounting expert to the audit committee. Prior literature documents positive cross-sectional associations between maintaining an accounting expert on the audit committee and financial reporting quality. Although this suggests that accounting expertise enhances the quality of a firm's financial reports, it is unclear whether financial reporting quality improves after appointing an accounting expert. Additionally, I explore how the strength of alternative governance provisions and the current expertise of the audit committee influence relations between appointing an accounting expert and changes in financial reporting quality. I hypothesize that accounting experts possess the financial backgrounds needed to detect accounting manipulations and the reputational capital to warrant actions that limit exposure to financial reporting failures. Therefore, I predict that newly appointed accounting experts have the ability and incentive to strengthen financial reporting systems and increase the quality of financial reports. Furthermore, I predict that incremental improvements in reporting quality following the appointment of an accounting expert are larger for strong governance firms because they possess the infrastructure necessary to act on audit committee recommendations and for firms with no prior accounting expertise because of opportunities for new accounting critiques by financially minded individuals. I test these predictions on a sample of 1,590 audit committee appointments between 2003 and 2005. Overall, I do not find empirical evidence of a change in financial reporting quality following the appointment of an audit committee accounting expert. However, I find that firms with strong governance that appoint an accounting expert experience larger post-appointment improvements in reporting quality than do firms with weak governance, as highlighted by more income-decreasing discretionary accruals, larger increases in earnings response coefficients, and higher quality accruals. Additionally, my evidence suggests that strong governance firms appointing their first accounting expert increase their reporting quality following the appointment. Therefore, my results imply that accounting expertise complements other governance mechanisms involved in financial monitoring. Overall, I provide evidence regarding the audit committee's influence over financial reporting and the conditions associated with effective use of accounting expertise.
Open Access
Book-tax differences and earnings growth
(University of Oregon, 2009-06) Jackson, Mark, 1963-
I examine the relation between book-tax differences (BTDs) and earnings growth. Because financial accounting rules afford managers more flexibility and discretion in reporting than tax accounting rules, prior studies suggest that large differences between book and taxable income indicate lower quality (or less persistent) earnings. Lev and Nissim and Hanlon provide evidence that BTDs contain information about future firm performance, but the nature of the causality in this relation is not clear. While BTDs could proxy for earnings quality, they may also reveal underlying economic events or management's private information about future performance or simply predict future reversals in effective tax rates. I divide total BTDs into their measurable components: temporary (deferred taxes) and non-temporary (permanent differences and tax accruals), and test their relation with the components of net income changes: pretax earnings changes and tax expense changes. I hypothesize that the non-temporary component of BTDs is negatively related to future changes in tax expense, whereas the temporary component of BTDs is negatively related to changes in future pretax earnings. I also examine the maintained hypothesis that the lower earnings growth for large BTD firms is due to earnings management. I use various proxies from prior literature to identify firms potentially managing earnings and test whether the presence or absence of suspected earnings management activity alters the relation between BTDs and earnings changes. My results provide compelling evidence that permanent BTDs are related only to future changes in tax expense, and temporary BTDs are related to changes in pretax earnings. These results are robust to multiple sensitivity analyses, including a replication of the sample and methodology of Lev and Nissim. The results also hold in the case of firms not suspected of earnings management. In fact, 1 find only limited evidence that the results are stronger in the presence of earnings management. Overall, my study suggests that it is only the temporary component of BTDs that is related to future firm performance, with non-temporary differences being related to future tax expense changes, and that these results are primarily due to underlying economic factors, not earnings management.
Open Access
Do Financial Analysts Influence Employee Treatment? Evidence from a Natural Experiment
(University of Oregon, 2022-02-18) Abdulsalam, Khaled; Peterson, Kyle
I examine the influence of financial analysts on firms’ treatment of employees. I apply a unique setting by implementing a difference-in-differences design around brokerage mergers as an exogenous shock to analyst coverage. Consistent with a hypothesis that analysts exert negative pressure on employee treatment, my findings show that the exogenous drop in analyst coverage results in a significant improvement in employee treatment. To provide further insight on the results, I run cross-sectional tests and find that the improvement in employee treatment is weaker among firms with more short-term oriented investors and stronger among firms that place greater value on human capital. I also find that the improvement in employee treatment is weaker when firms are more financially constrained and stronger when firms are under more analyst pressure due to previously missing analysts’ consensus earnings forecasts. Finally, I find that the improvement in employee treatment, due to the exogenous drop in analyst coverage, appears to lead to greater innovation. My paper speaks to how analysts can influence stakeholder management by offering evidence on the adverse consequence of analyst coverage on employee treatment.
Open Access
Do Financial Expert Directors Affect the Incidence of Accruals Management to Meet or Beat Analyst Forecasts?
(University of Oregon, 2013-10-03) Hsu, Pei Hui; Matsunaga, Steven
Evidence that firms adjust accruals to just meet or beat analyst forecasts is pervasive. However, the implications for earnings quality are not clear. Managers can use this practice either to mislead investors, resulting in lower quality earnings, or to signal future earnings growth and thereby improve the decision usefulness of earnings. Assuming that boards are concerned about providing higher quality financial information and that they can discern the proper earnings signal, they should discourage managers from adjusting earnings to beat the analyst forecast target if such adjustment diminishes earnings quality. Consistent with this prediction, I find a significantly negative relation between the probability that a firm beats the target by adjusting accruals and the presence of at least one independent audit committee financial expert for firms with poor future performance. I also find that the negative impact of an independent financial expert on the odds of beating the target by adjusting accruals is significantly stronger for firms with poor future performance than for firms with strong future performance. These findings are consistent with financial expertise on the audit committees improving corporate governance by protecting shareholders from accruals management that reduces the decision usefulness of earnings.
Open Access
Do managers alter the tone of their earnings announcements around stock option grants and exercises?
(University of Oregon, 2009-06) Tama-Sweet, Isho, 1973-
In this dissertation I investigate whether managers alter the linguistic tone of their earnings announcements to increase the value of their stock options. Empirical research finds evidence that managers use optimistic tone to signal future firm performance. However, prior literature also finds a positive relation between optimistic tone in earnings announcements and short-window abnormal returns. The market reaction to optimistic tone suggests that managers can profit from using pessimistic tone to lower the firm's stock price prior to option grants and optimistic tone to increase the stock price prior to option exercises. I hypothesize that managers adjust the tone of their earnings announcements to increase the value of their stock options. In addition, I hypothesize that managers will alter the tone to increase option payouts when the costs of doing so (proxied by litigation risk) are low and when the financial reporting incentives to do so (proxied by earnings management) are high. I test these predictions using 17,211 firm-quarter observations from 1998-2006. In my tests I regress the tone of the earnings announcement on its known determinants and indicators for a stock option grant or exercise shortly following the announcement. I do not find evidence that managers, on average, alter the tone of earnings announcements prior to option grants or exercises. However, I find that managers decrease optimistic tone prior to option grants when they also record low discretionary accruals, which suggests that altering tone and managing earnings are complementary strategies to move stock price. I also find that managers increase optimistic tone prior to option exercises when litigation risk is low, but decrease optimistic tone prior to option exercises when litigation risk is high. Further analysis indicates the litigation risk results hold only after the Sarbanes-Oxley Act of 2002. Overall, my evidence suggests that managers increase optimistic tone prior to option exercises except when a high threat of litigation constrains such opportunism. When managers do alter tone, the average financial gain is small relative to their total compensation.
Open Access
Do Managers Respond to Tax Avoidance Incentives by Investing in the Tax Function? Evidence from Tax Departments
(University of Oregon, 2021-04-27) Li, Zhongyang (John); Guenther, David
While prior literature examines the role of incentives in motivating top managers to engage in corporate tax avoidance, there is little evidence on the specific actions that managers take in response to these incentives. Motivated by the premise that a manager can influence a firm’s tax activities by emphasizing the tax function, I investigate whether four specific tax avoidance incentives studied in prior literature (financial constraints, equity risk incentives, hedge fund interventions, and analyst cash flow forecasts) induce managers to make investments in the firm’s tax department. Using a dataset of tax employees collected from the website LinkedIn, I find evidence that each incentive is significantly associated with an increase in the number of employees within the tax department. This association is stronger among higher ranked employees and employees with prior tax department experience. In supplementary analyses, I find that some incentives also induce managers to pay higher tax fees to the firm’s auditor and engage in tax lobbying. Overall, my findings are consistent with the premise that managers invest resources in the tax function when incentivized to avoid taxes. My study also provides assurance that the association between incentives and effective tax rates documented in prior studies is reflective of intentional tax avoidance behavior.
Open Access
Do Private Tax Disclosures Affect the Quality of Public Financial Reporting?
(University of Oregon, 2022-10-04) Wu, Juan; Krull, Linda
This study investigates whether increased private tax disclosures have implications for the quality of public financial reporting in the context of Schedule UTP. In terms of the predictive value of tax reserves, I find that firms reverted from being over-reserved to being adequately reserved post-Schedule UTP. In terms of the confirmatory value of tax reserves, I find that firms report more accurate tax reserves post-Schedule UTP, as evidenced by the higher explanatory power of the UTB prediction model (Rego and Wilson, 2012) and reduced tax expense management post-Schedule UTP. In terms of the informativeness of tax reserves, I find that analysts’ ETR forecast accuracy is improved post-Schedule UTP, suggesting reduced information asymmetry between firms and financial statement users. Overall, this study provides evidence that other stakeholders beyond tax authorities benefit from increased private tax disclosures, and Schedule UTP may have achieved the goal intended by the FASB.
Open Access
Does the Diversification of Tax Strategies affect Tax Risk?
(University of Oregon, 2019-09-18) Krieg, Kimberly; Guenther, David
I investigate the effect that the number of different tax strategies employed by a public company has on the relation between measures of corporate tax avoidance and measures of risk. Prior studies have generally failed to find a relation between measures of overall firm risk (such as stock return volatility) and measures of corporate tax avoidance (such as low effective tax rates). One possible reason for this empirical result is the failure to consider the role that the diversification of tax risk, through utilization of a portfolio of different tax avoidance strategies, might have on reducing tax risk and, as a result, on reducing overall firm risk. I create a broad measure of diversification based on five sources of tax benefits. Controlling for the level of tax avoidance, I regress measures of risk on diversification and an interaction term and find weak support that diversification reduces tax risk, as measured by the volatility of future cash ETRs, and mixed evidence on the effect of diversification on overall firm risk, as measured by the volatility of future monthly stock returns.
Open Access
The Effect of Managerial Reputation on Corporate Tax Avoidance
(University of Oregon, 2012) Kim, Jin Wook; Kim, Jin Wook; Guenther, David
Prior literature suggests that tax avoidance is an effective way to enhance firm value. However, there appears to be considerable cross-sectional variation in tax avoidance, and it is not clear why some firms do not take full advantage of the tax avoidance opportunities being used by others. This study examines whether managerial reputation, as proxied by high-profile awards to top managers, is helpful in explaining corporate tax avoidance. The empirical results show that, relative to a matched control group, firms managed by a celebrity manager have significantly higher cash and GAAP effective tax rates in the three year period following the manager's first award than preceding the award. This result is consistent with the conjecture that celebrity managers, for fear of being labeled as "poor citizens," engage in less tax avoidance once they have an established reputation.
Open Access
Equity Valuation of Modern Master Limited Partnerships
(University of Oregon, 2015-08-18) Mandell, Aaron; Wilson, Ryan
Using a sample of 57 master limited partnerships (MLPs) formed from corporate assets between 1982 and 2011, I examine the share price effects on parent corporations from forming MLPs. Specifically, I compare announcement period returns during the first and second waves of MLP formations—1982-1987 and 1988-2011, respectively—to assess the effect of structural changes in the MLP agency and operating environments on the market response to MLP formation. I document significantly higher 3-day and 5-day announcement period returns for second wave MLP formations, suggesting that changes to the MLP agency and operating environments have enhanced the value impact of MLP formation. I also find evidence that parent corporations benefit from the increased opportunity to exploit conflicts of interest with the MLP, which arise from these changes. Finally, I examine the prediction of prior literature that MLP formation improves the parent company’s information environment, finding support for this assertion in the form of reduced idiosyncratic return volatility.
Open Access
Financial Accounting Standards, Audit Profession Development, and Firm-Level Tax Evasion
(University of Oregon, 2016-02-23) Williams, Brian; Guenther, David
In this study I investigate the relation between (1) country-level financial accounting standards and audit profession development and (2) firm-level tax evasion. I investigate this relation using a confidential dataset compiled by the World Bank that provides an estimate of the percent of a firm’s sales reported to the tax authority as well as information on local corruption and economic development. This database includes firms both with and without externally audited financial statements. After controlling for corruption, economic development, rule of law, and other firm, local, and country-level variables I find that firms in countries with more rigorous financial accounting standards and a more developed audit profession evade less tax and that this effect is stronger when firms have externally audited financial statements and thus are more directly influenced by the financial accounting standards and level of audit profession development in their country. These results have important implications for tax authorities and for other policy makers debating whether to dedicate scarce resources to improving their countries’ financial reporting environment.
Embargo
How does the stock market respond to R&D cuts used to manage earnings?
(University of Oregon, 2016-10-27) Li, Zhaochu; Wilson, Ryan
Prior research shows returns are positive when firms meet or beat analysts’ consensus forecasts but negative when firms miss. Past studies also show managers frequently cut R&D expenses in order to meet the consensus forecast. Despite these findings, there is limited evidence about how the market responds when firms beat the forecast by cutting R&D. This study shows the stock market penalizes firms that use R&D cuts to manage earnings and exacts a discount to the market reward if beating the forecast requires cutting R&D. The discount is only partial and firms are still better off doing so in the short run. Furthermore, this study shows the R&D cuts used to manage earnings are concentrated in specific industries and are likely temporary, as firms tend to increase R&D spending in the subsequent period. Investors appear to recognize these short-term cuts and treat them similar to accruals.
Embargo
Human-Interaction-based Information and Managerial Learning from Stock Prices: Evidence from the COVID-19 Pandemic
(University of Oregon, 2024-01-10) Park, Seyoung; Wilson, Ryan
Despite growing evidence managers learn information from stock prices that guide their investment decisions, the forms of information that underlie this learning mechanism are not well understood. This paper explores whether information produced by investors’ in-person human interactions is a key form of this information. Using foot traffic based on GPS location data from customers’ smartphones as a proxy for human-interaction-based information in stock prices, I find that investment-q sensitivity increases with foot traffic, consistent with managerial learning from prices increasing with the amount of human-interaction-based information in prices. To mitigate omitted variable bias, I use lockdowns triggered by the COVID-19 pandemic as exogenous shocks to information produced by human interactions. I find a decrease in investment-q sensitivity during the pandemic. The decrease is more pronounced when foot traffic decreases in places where human interactions are most likely to produce new information (e.g., cafés and restaurants) and among local firms, for which human-interaction-based information production was more active pre-pandemic. I further find that the decrease is more marked among young and growing firms, which investors have a comparative advantage in evaluating. Lastly, I show that my findings are not explained by noise trading, financial constraints, managers’ direct acquisition of human-interaction-based information, and local economic conditions. Taken together, I provide novel evidence of human-interaction-based information being a key form of information underlying managerial learning from stock prices.
Open Access
Individual Executive Characteristics and Firm Performance: Evidence from CEO Narcissism
(University of Oregon, 2017-09-06) Perez, Rebeca; Matsunaga, Steven
Narcissism refers to persistent feelings of grandiosity, a need for admiration, and a lack of empathy (American Psychiatric Association 2013). The literature has found narcissism to be associated with individuals making decisions for a firm that fulfill their egos rather than maximize firm value. The literature in psychology, however, suggests that when firms face financial distress, narcissism could be a desirable trait in an individual, enabling the CEO to take the necessary risks and make the necessary decisions for the firm to recover. I study the context under which a firm may benefit from a narcissistic CEO. In this study, I use two measures from prior literature (CEO photo prominence in the annual report and a CEO’s use of first-person personal pronouns) to form a combination measure to investigate whether firms in financial distress are more likely to appoint a CEO with more narcissistic traits. I find some evidence to support this hypothesis. I also examine whether the association between narcissism and future firm performance is affected by the economic conditions of a firm and the visibility of the firm. I find results consistent with firm financial distress increasing a narcissistic CEO’s effect on firm performance in low-visibility firms.
Open Access
The Information Content of Risk Factor Disclosures in Quarterly Reports
(University of Oregon, 2011-06) Filzen, Joshua James, 1981-
I examine whether recently required Risk Factor update disclosures in quarterly reports provide investors with timely information regarding potential future negative outcomes. Specifically, I examine whether Risk Factor updates in 10-Q filings are associated with negative abnormal returns at the time the updates are disclosed and whether quarterly updates are followed by negative earnings shocks. I find that firms presenting updates to their Risk Factor disclosures have lower abnormal returns around the filing date of the 10-Q relative to firms without updates, although I find little evidence to suggest that the strength of this relationship is positively associated with the level of information asymmetry between managers and investors. Using analyst forecasts and a cross-sectional model to forecast earnings as measures of expected earnings prior to the release of Risk Factor updates, I find that firms with updates to their Risk Factors section have lower future unexpected earnings. I also find that firms with Risk Factor updates are more likely to experience future extreme negative earnings forecast errors. These findings suggest that the recent disclosure requirement mandated by the SEC was successful in generating timely disclosure of bad news. However, I also find some evidence that firms with updates to their Risk Factors section have stronger future positive performance shocks relative to firms without Risk Factor Updates, consistent with firms that disclose Risk Factor updates also having greater upside potential.
Open Access
Private Litigation as a Regulator of Accounting Standards
(University of Oregon, 2015-08-18) Cutler, Joshua; Davis, Angela
I examine the impact of the trend of private class actions targeting alleged violations of generally accepted accounting principles (GAAP). I document the specific allegations in GAAP lawsuits and find that allegations involving revenue recognition and asset impairment recognition are two of the most common areas of GAAP cited. I test whether lawsuits lead to a reduction in the allegedly improper behavior, whether sued firms and their peers make other financial reporting changes, and whether these changes change firms’ stock price characteristics. I find that following relevant lawsuits, sued firms, firms in the same industry, and firms with a shared auditor generally exhibit less aggressive revenue recognition, but firms may increase aggressive revenue recognition in certain cases. Next, I examine the impact of asset impairment recognition allegations on the reporting of negative special items. I find few changes directly associated with these allegations but show that other litigation is associated with both increases and decreases in the propensity and size of negative special item reporting. I note that GAAP violations most often arise in an attempt to meet or beat analysts’ estimates, and I show following litigation firms are often more likely to beat analysts’ expectations by a larger margin. I also find significant increases in real earnings management of sued firms and their peers following many lawsuits, indicating a shift away from accruals-based management towards real activities management. Finally, I find mixed evidence of changes in stock return attributes. In some cases I observe significant changes consistent with reduced litigation risk and in others I observe the opposite. The results have implications for accounting standard setting and show that the legal system plays a critical role in shaping the financial reporting environment.
Open Access
The Role of Taxes in Foreign Earnings Management: Implications for Pricing of Foreign Earnings
(University of Oregon, 2014-09-29) Huang, Jingjing; Guenther, David
U.S. multinational corporations are well known for shifting income to low tax foreign subsidiaries to avoid U.S. income tax. Yet little is known about how multinational corporations opportunistically use low tax foreign subsidiaries for financial reporting purpose. Understanding this question has implications for U.S. accounting regulators to set enforcement targets. Using worldwide consolidated financial statements, I examine the role of taxes for multinational corporations to manage earnings in foreign subsidiaries. I find that by managing earnings in low tax foreign countries, multinational corporations can reduce the effective tax rate on pretax accrual earnings by an average of 4.3%. To examine the implication of opportunistic foreign earnings management on investors' equity valuation, I find evidence that investors do not seem to overvalue foreign managed earnings compared to domestic managed earnings, though foreign earnings are on average valued higher than domestic earnings.
Open Access
Taxes and the Use of Subjectivity in Executive Bonus Plans
(University of Oregon, 2021-09-13) Fox, Zackery; Wilson, Ryan
In this study, I examine whether taxes influence the design of executive compensation incentives. Recently, the Tax Cuts and Jobs Act (TCJA) removed the requirement that bonus plans be tied to objective and verifiable performance measures for the bonus to be tax deductible. A potential consequence of this removal is that firms will begin to rely more heavily on subjectivity and discretion in their bonus arrangements. I find an increase, post-TCJA, in both the number of and the weight applied to performance measures with discretionary criteria. Using various cross-sectional analyses, I further connect my findings to taxes and find that the effect I document is concentrated among firms with a greater sensitivity to the loss of a tax deduction from the TCJA. Overall, the results suggest that the recent tax reform influenced the design of executive bonus plans by facilitating the inclusion of additional subjective performance measures.