Accounting Theses and Dissertations

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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
The Effect of SEC Staff Diversity on Investigation Decisions
(University of Oregon, 2024-01-09) Gabrielsen, Lance; Peterson, Kyle
I explore how ethnic and gender diversity at the Securities and Exchange Commission (SEC) affects its investigation decisions. Employing a novel dataset of SEC employees, I find a positive association between SEC office-level diversity and the propensity of the Commission to open investigations. These results strengthen when interacted with the occurrence of a trigger that an investigation may be warranted. This evidence is consistent with diversity improving the investigative abilities of the agency. Additionally, I study how diversity influences investigation outcomes. I find that more diverse offices open investigations that are shorter and less likely to lead to enforcement. While potentially suggestive of the inefficiencies of diversity, this evidence is also consistent with more diverse staff being assigned less serious, easier-to-resolve investigations. Lastly, I find that SEC-firm similarity moderates the diversity-investigation relation. Specifically, when both the SEC staff and firm executives have high levels of diversity, the Commission is less likely to open investigations, highlighting a potential leniency bias towards diverse firms.
Open Access
Ultimate Beneficial Ownership Disclosure Regulation and the Real effects of Investment: A Cross-Country Analysis
(University of Oregon, 2023-03-24) Berry, Erica; Krull, Linda
In this study, I examine whether laws mandating disclosure of ultimate beneficial ownership of entities influence outbound foreign direct investment activities. The secrecy provided by anonymous companies allows the individuals controlling a company to be obscured, a factor that can be used to hide improper or illicit activity. I take advantage of the staggered enactment of laws in countries that require disclosure of beneficial owners to assess whether firms change their foreign direct investment behavior in response to increased transparency. I find limited evidence that, on average, firms reduce their outbound foreign direct investment behavior in response to ultimate beneficiary ownership disclosure laws. However, in a cross-sectional analysis, I find that the level of perceived corruption, the existence of country-by-country reporting requirements, and location as a known tax haven affect how firm investment changes upon enactment of laws mandating disclosure of ultimate beneficial ownership.
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
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
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.
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
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
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 Interaction of Incentive and Opportunity in Corporate Tax Avoidance: Evidence from Financially Constrained Firms
(University of Oregon, 2018-09-06) Wu, Kaishu; Guenther, David
I hypothesize and find that the variation in corporate tax avoidance is jointly determined by firms’ incentive and opportunities to avoid taxes. Specifically, the positive relation between financial constraints (my proxy for an incentive to avoid taxes) and tax avoidance is significantly stronger for firms with high tax planning opportunities (TPO), where TPO is the distance between a firm’s actual and predicted ETRs. I further show that firms with TPOs based on high permanent (temporary) book-tax differences exhibit more permanent (temporary) book-tax differences under financial constraints. From a risk perspective, I find no evidence that financially constrained firms with low TPO exhibit more tax risk but some evidence that those with high TPO do so. In general, the findings in this paper provide evidence consistent with an incentive-opportunity interaction story to help explain differences in corporate tax avoidance.
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.
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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.
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.
Open Access
Top Management Team Functional Diversity and Management Forecast Accuracy
(University of Oregon, 2015-08-18) Wang, Shan; Matsunaga, Steve
Prior literature documents that the diversity of top management team (TMT) functional experiences enhances firm performance through its effect on information processing and sharing between team members. In this study, I examine whether TMT functional diversity affects management forecast accuracy via the information aggregation and communication among top executives. If functional diversity among individuals allows top executives to better process and share information, a greater degree of functional diversity should lead to more accurate management forecasts. TMT functional diversity can take two forms. The first, between-member functional diversity, refers to the heterogeneity in the primary functional domains of each TMT member, and the second, within-member functional diversity, refers to the average intrapersonal breadth of functional experiences of each TMT. I find that both types are positively associated with management forecast accuracy. In cross-sectional analyses, I find that the effect of TMT functional diversity is more important for firms with greater uncertainty and complexity and for firms that are led by CEOs and CFOs who are narrow functional specialists. Collectively, the results suggest that TMT functional diversity plays an important role in management disclosure, thereby shedding light on how the knowledge composition of top management influences the aggregation and communication of financial information.
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
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
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
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
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
Why Do Acquirers Manage Earnings Before Stock-for-Stock Acquisitions?
(University of Oregon, 2011-06) Tran, Nam D.
In this dissertation, I examine whether high disclosure costs explain why acquirers manage earnings before stock-for-stock acquisitions. Because stock-for-stock acquirers use their own shares to pay for targets' shares, stock-for-stock acquirers have incentives to manage earnings in order to boost their stock prices. I show that high disclosure costs lead to an equilibrium in which acquirers engage in earnings management in a manner consistent with target firms' expectations. As a result, I hypothesize that stock-for-stock acquirers with high disclosure costs are more likely to manage earnings before the acquisition than stock-for-stock acquirers with low disclosure costs. Using a sample of stock-for-stock acquisitions in the United States during the period from 1988 to 2009, I find a positive association between acquirers' proprietary disclosure costs and pre-acquisition abnormal accruals. In addition, I find a negative association between pre-acquisition abnormal accruals and abnormal stock returns around the acquisition announcement for acquirers with high proprietary disclosure costs but not for acquirers with low proprietary disclosure costs. Assuming that the market is efficient with respect to publicly available information, this evidence is also consistent with acquirers with high proprietary disclosure costs using abnormal accruals to manage earnings. Finally, I do not find a statistically significant association between the extent of acquirers' earnings management and the acquisition premium received by target shareholders. This is consistent with acquirers' earnings management not serving to extract wealth from target shareholders. Overall, the evidence in this dissertation suggests that earnings management by stock-for-stock acquirers is a rational response to targets' expectations when high disclosure costs prevent the acquirers from credibly signaling the absence of earnings management.