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We examine auditors’ disclosure benchmarking, which we define as auditors’ acquisition of nonclient financial statement information for the purpose of evaluating a client’s financial statement information. Employing a novel dataset that captures auditors’ access of nonclient annual and quarterly SEC filings on EDGAR, we predict and find that auditors engage in disclosure benchmarking when auditing clients are faced with higher levels of authoritative guidance, financial-reporting uncertainty, and litigation risk. Lastly, we predict that auditors incorporate the information they obtain into their audit. Consistent with our prediction, disclosure benchmarking is positively associated with a client’s financial statement disaggregation, and client footnotes exhibit greater comparability to targeted nonclients’ footnotes after disclosure benchmarking. Overall, this study offers an empirical look into the “black box” of the audit process.

Using a novel pairwise measure of firms’ acquisition of rivals’ disclosures, we show that investment opportunities drive interfirm information flows. We find that these flows predict subsequent mergers and acquisitions as well as how and how much firms invest, relative to rivals. Moreover, firms’ use of rivals’ information often hinges on the similarities of their products. Our results suggest that rivals’ public information, far from being unusable, helps facilitate investment and product decisions, including acquisitions and product differentiation strategies. The findings also support a learning mechanism that could partly underlie the emerging literature on peer investment effects.

Prior literature has documented that investor attention and constraints on that attention are associated with the pricing of stocks. We introduce the concept of attention comovement, which is the extent to which investor attention to a firm is explained by attention paid to the firm’s industry and the market in general. We find that attention comovement is nontrivial for the average firm and is related to firm characteristics, such as size and visibility. We also find that the comovement of investor attention has market consequences, in that it is positively associated with excess stock return comovement. Finally, we show that a firm’s earnings announcement contributes to the transfer of attention from one firm to its peer firms. Our results provide insights about the information flows underlying return comovement and aid in understanding the micro and macronature of investor attention. This paper was accepted by Mary Barth, accounting.

We investigate systematic changes in corporate effective tax rates over the past 25 years and find that effective tax rates have decreased significantly. Contrary to conventional wisdom, the decline in effective tax rates is not concentrated in multinational firms; effective tax rates have declined at approximately the same rate for both multinational and domestic firms. Moreover, within multinational firms, both foreign and domestic effective rates have decreased. Finally, changes in firm characteristics and declining foreign statutory tax rates explain little of the overall decrease in effective rates.

The internet is an enormous and growing source of information for investors about the opinions of others. Virtually any individual with internet access can express opinions about firms and editorialize about company news. However, to date we know very little about the impact these non-traditional internet intermediaries have on markets. We develop a framework wherein internet information intermediaries fall along a spectrum of professionalism and document a nuanced relationship between coverage by these intermediaries and capital market effects. Using a novel dataset that tracks coverage of companies by individuals posting on thousands of websites, we find that coverage by professional and semi-professional intermediaries is associated with positive capital market effects, but coverage by non-professional internet intermediaries has the opposite effect – hindering price formation. The detrimental effects of non-professional coverage are observed most strongly when the intermediaries have a larger audience. Collectively, these results provide important new insights into the internet’s role as an information intermediary.

SYNOPSIS We link EDGAR requests for financial statements originating from a particular U.S. ZIP code to demographic characteristics of that ZIP code. We focus on four demographics: income, household characteristics, education, and local conditions. Overall, we find each of the four demographics explain significant cross-sectional variation in EDGAR financial statement use. On a relative basis, we find that education has significantly more explanatory power for financial statement usage than does income or household characteristics. In our examination of specific demographic factors, we find that EDGAR financial statement usage is higher in areas with major cities, more accounting and finance jobs, higher capital gains and dividend income, greater access to broadband internet, a top 100 business school, or higher rates of college-educated residents. Usage is lower in ZIP codes with more fixed income, business income, retirees, unemployed workers, homeowners, or households with children. Overall, these results provide a general portrait of the users of financial statements hosted online on EDGAR.

Prior work suggests that firms targeted by contentious activist challenges respond with impression management, promoting positive images of their social performance to maintain audience support. In this paper, we propose that targeted firms face simultaneous incentives to downwardly manage audience members’ impression of their economic performance through negative earnings management. We draw on work in accounting, law, and sociology that suggests that profitability operates as an aggravating cue in punitive assessments and can augment the likelihood of expensive regulatory interventions during periods of political uncertainty. Accordingly, we suggest that firms are motivated to manage their earnings downward when facing contentious challenges. We test this through a longitudinal analysis of firms’ discretionary accruals-based earnings management over the decade spanning 1997-2007. In line with our theory, we find that contentious challenges are associated with significant down-ward adjusted earnings management, and that this is moderated by factors indicating a firm’s general level of non-market risk, including its reputation, the level of political attention directed to it, and regulators’ capacity for monitoring its financial statements.

In this study we investigate the usefulness of historical accounting reports (10-Ks and 10-Qs) by examining four settings where we expect investors to acquire historical reports in order to obtain qualitative and quantitative information that contextualizes and conditions information released in the current period. Using a novel dataset that tracks user requests for accounting reports stored in the SEC EDGAR database, we find that requests for historic reports during the fiscal year are positively associated with financial reporting complexity and that requests around earnings announcements are positively associated with accounting discretion and negative earnings shocks (particularly for conservative firms). Finally, we find that daily requests for historical reports are positively associated with shocks to firm value (particularly negative shocks). Overall, our evidence suggests that historical reports make up an important component of the information mosaic assembled by investors.

Many online retail firms (e-tailers) do not collect sales tax from the majority of their customers. This practice provides these firms with a potential competitive advantage over traditional retail...

Prior research examines practitioner, investor, and executive perceptions of corporate tax planning. However, little is known about how the typical U.S. consumer views corporate tax planning. We examine consumers’ perceptions of corporate tax planning using both survey and experimental methods. First, we survey U.S. consumers and find that while most express negative preferences for tax planning, they rank it at the bottom of purchase decision factors. Few consumers recall ever seeing a negative media article about taxes. Thus, while consumers state a preference against corporate tax planning, that preference is not particularly strong. However, for the minority of consumers who have read negative articles about a firm’s tax planning, a significant portion claim to have changed their purchasing behavior accordingly. Second, we use an experiment to investigate the consumer effects of tax planning, randomly treating consumers with exposure to news about tax planning and imposing real economic consequences on the participants. We find that consumers exposed to negative tax information about a firm are significantly less likely to prefer receiving a gift card from that firm, suggesting that there is an effect of tax planning on consumer preferences even in the presence of a real economic consequence.

We investigate whether managers “hide” bad news by announcing earnings during periods of low attention, or by providing less forewarning of an upcoming earnings announcement. Our findings are consistent with managers reporting bad news after market hours, on busy days, and with less advance notice, and with earnings receiving less attention in these settings. Paradoxically, our findings indicate that managers also report bad news on Fridays, but we do not find lower attention on Fridays. Further, we find negative returns when the market is notified of an upcoming Friday earnings announcement, which is consistent with investors inferring forthcoming bad news.

Each year, the NCAA basketball tournament (March Madness) is a daytime distraction for millions of people, providing a largely exogenous shock to investor attention. We investigate whether March Madness influences the market response to earnings by diverting investor attention away from earnings news. We find that the price reaction to earnings news released during March Madness is muted. This result generally holds across several samples and additional analyses. We also find that the result is more muted for low institutional ownership firms, consistent with the effect being driven by less-sophisticated investors. Furthermore, we find that it takes the market 30 to 60 days to correct for the distraction effect. Overall, we provide a unique test of the theory of limited attention by documenting that extraneous events can have a significant impact on the pricing of earnings.

Using a novel data set that tracks all web traffic on the SEC's EDGAR servers from 2008 to 2011, we examine the determinants and capital market consequences of investor information acquisition of SEC filings. The average user employs the database very few times per quarter and most users target specific filing types such as periodic accounting reports; a small subset of users employ EDGAR almost daily and access many filings. EDGAR activity is positively related with corporate events (particularly restatements, earnings announcements, and acquisition announcements), poor stock performance, and the strength of a firm's information environment. EDGAR activity is related to, but distinct from, other proxies of investor interest such as trading volume, business press articles, and Google searches. Finally, information acquisition via EDGAR, both to obtain earnings news and to provide context for it, has a positive influence on market efficiency with respect to earnings news. Overall, our results are important because they provide a unique, user-based perspective on investor access of mandatory disclosures and its impact on price formation

We empirically investigate one form of illegal investor-level tax evasion and its effect on foreign portfolio investment. In particular, we examine a form of round-tripping tax evasion in which U.S. individuals hide funds in entities located in offshore tax havens and then invest those funds in U.S. securities markets. Employing Becker's (1968) economic theory of crime, we identify the tax evasion component by examining how foreign portfolio investment varies with changes in the incentives to evade and the risks of detection. To our knowledge, this is the first empirical evidence of investor-level tax evasion affecting cross-border equity and debt investment.

We examine auditors’ disclosure benchmarking, which we define as auditors’ acquisition of non-client financial statement information for the purpose of evaluating a client’s financial statement information. Employing a novel dataset that captures auditors’ access of non-client annual and quarterly SEC filings on EDGAR, we predict and find that auditors engage in disclosure benchmarking when auditing clients faced with higher levels of reporting complexity, financial reporting risk, and litigation risk. Lastly, we predict that auditors incorporate the information they obtain via disclosure benchmarking into their audit. Consistent with our prediction, disclosure benchmarking is positively associated with a client’s financial statement disaggregation, and client footnotes exhibit greater comparability to targeted non-clients’ footnotes after disclosure benchmarking. Overall, this study offers an empirical look into the “black box” of the audit process by examining auditor benchmarking and its effects on client financial reports.

We investigate whether firms and their top executives bear reputational costs from engaging in aggressive tax avoidance activities. Prior literature has posited that reputational costs partially explain why so many firms apparently forgo the benefits of tax avoidance, the so-called “under-sheltering puzzle.” We employ a database of 118 firms that were subject to public scrutiny for having engaged in tax shelters, representing the largest sample of publicly identified corporate tax shelters analyzed to date. We examine the reputational costs that prior research has shown that firms and managers face in cases of alleged misconduct: increased CEO and CFO turnover, auditor turnover, lost sales, increased advertising costs, and decreased media reputation. Across a battery of tests, we find little evidence that firms or their top executives bear significant reputational costs as a result of being accused of engaging in tax shelter activities. Moreover, we find no decrease in firms’ tax avoidance activities after being accused of tax shelter activity. Finally, in tests of the capital market reaction to news of tax shelter involvement, we find that negative event-period returns fully reverse within a few weeks of the public scrutiny, consistent with a temporary market penalty to tax shelter news. In all, we conclude that there is little evidence of tax shelter usage leading to reputational costs at the firm level.

This study examines the effects of dividend taxation on the primary parties involved in a short sale: the lender of the stock and the short seller. For stock lenders, dividend taxation is associated with a decrease in the supply of shortable shares and an increase in equity lending fees around the dividend record date. For short sellers, potential reimbursement costs are associated with a significant decrease in short volume before the ex-dividend date followed by a significant increase after the ex-date. Prior research shows that short selling improves price efficiency and formation. Hence, because of the negative effects of taxation on shorting, market quality declines along several dimensions: equity mispricing, increased loan search frictions, loan price inefficiencies, and market microstructure breakdown. In sum, this study documents that taxation constricts the shorting market around the dividend dates, which in turn has negative implications for market quality. JEL Classifications: G11, G12, G23, H20

We use the 2008 short selling regulations to test whether short sale restrictions can increase informed short selling. For the preborrow requirement, we find more negative price reactions to short interest announcements though no reliable increase in the price impact of short sales volume. For the stocks with banned short sales, we find an increase in the price impact of short sale volume though no reliable change in the price reaction to short interest announcements. Both restrictions, however, are associated with increased informed trading. Our results suggest that short restrictions will not reduce informed short selling and may actually result in an increase by increasing the proportion of informed short sellers..

This study uses state tax amnesties to examine how firms respond to forgiveness—particularly repeated forgiveness—by a taxing authority. We posit that tax forgiveness programs alter taxpayer perceptions of the probability of detection by enforcers or the probability of future forgiveness programs, either of which could affect future tax aggressiveness. We find that firms headquartered in an amnesty-granting state increase state income tax aggressiveness following the first instance of tax amnesty, relative to control firms in other states. Moreover, we find evidence that tax aggressiveness incrementally increases with each additional repetition of a tax amnesty. Finally, we find that the effect of amnesties on tax aggressiveness is more prominent for small firms, which face less tax authority scrutiny and for which the tax aggressiveness measures are less confounded. Our findings suggest that repeated programs of tax forgiveness have increasingly negative implications for corporate tax collections.

This study examines whether the information content of earnings announcements – abnormal return volatility and abnormal trading volume – increases in countries following mandatory IFRS adoption, and conditions and mechanisms through which increases occur. Findings suggest information content increased in 16 countries that mandated adoption of IFRS relative to 11 that maintained domestic accounting standards, although the effect of mandatory IFRS adoption depends on the strength of legal enforcement in the adopting country. Utilizing a path analysis methodology, we find evidence of three mechanisms through which IFRS adoption increases information content: reducing reporting lag, increasing analyst following, and increasing foreign investment.

We investigate systematic changes in corporate effective tax rates over the past 25 years and find that effective tax rates have decreased significantly. Contrary to conventional wisdom, we find that the decline in effective tax rates is not concentrated in multinational firms; effective tax rates have declined at approximately the same rate for both multinational and domestic firms. Moreover, we find that within multinational firms, both foreign and domestic effective rates have decreased. Finally, we find that changes in firm characteristics and declining foreign statutory tax rates explain little of the overall decrease in effective rates. The findings have broad implications for research, as well as for current policy debates about reforming the corporate income tax.

Many online retail firms (e-tailers) do not collect sales tax from the majority of their customers, providing these firms a potential competitive advantage over traditional retailers. We examine stock market returns and analysts’ sales forecast revisions surrounding federal legislative proposals, such as the Marketplace Fairness Act, that could erode this alleged competitive advantage for e-tailers. Following events that indicated an increased likelihood of federal sales tax legislation, we find negative abnormal stock returns for e-tail firms relative to traditional retail firms. We also find that analysts forecast a future reduction in sales revenue for e-tailers. These findings imply the existence of a competitive advantage for e-tailers, which advantage will potentially diminish with the enactment of federal sales tax legislation.

We investigate whether managers “hide” bad news by announcing earnings during periods of low attention, or by providing less forewarning of an upcoming earnings announcement. Our findings are consistent with managers reporting bad news after market hours, on busy days, and with less advance notice, and with earnings receiving less attention in these settings. Paradoxically, our findings indicate that managers also report bad news on Fridays, but we do not find lower attention on Fridays. Further, we find negative returns when the market is notified of an upcoming Friday earnings announcement, which is consistent with investors inferring forthcoming bad news.

In this study we investigate the usefulness of historical accounting reports (10-Ks and 10-Qs) by examining four settings where we expect investors to acquire historical reports in order to obtain qualitative and quantitative information that contextualizes and conditions information released in the current period. Using a novel dataset that tracks user requests for accounting reports stored in the SEC EDGAR database, we find that requests for historic reports during the fiscal year are positively associated with financial reporting complexity and that requests around earnings announcements are positively associated with accounting discretion and negative earnings shocks (particularly for conservative firms). Finally, we find that daily requests for historical reports are positively associated with shocks to firm value (particularly negative shocks). Overall, our evidence suggests that historical reports make up an important component of the information mosaic assembled by investors.

We investigate whether firms and their top executives bear reputational costs from engaging in aggressive tax avoidance activities. Prior literature has posited that reputational costs partially explain why so many firms apparently forgo the benefits of tax avoidance, the so-called “under-sheltering puzzle.” We employ a database of 118 firms that were subject to public scrutiny for having engaged in tax shelters, representing the largest sample of publicly identified corporate tax shelters analyzed to date. We examine the reputational costs that prior research has shown that firms and managers face in cases of alleged misconduct: increased CEO and CFO turnover, auditor turnover, lost sales, increased advertising costs, and decreased media reputation. Across a battery of tests, we find little evidence that firms or their top executives bear significant reputational costs as a result of being accused of engaging in tax shelter activities. Moreover, we find no decrease in firms’ tax avoidance activities after being accused of tax shelter activity. Finally, in tests of the capital market reaction to news of tax shelter involvement, we find that negative event-period returns fully reverse within a few weeks of the public scrutiny, consistent with a temporary market penalty to tax shelter news. In all, we conclude that there is little evidence of tax shelter usage leading to reputational costs at the firm level.

Using a novel dataset that tracks all web traffic on the SEC’s EDGAR servers from 2008-2011, we examine the determinants and capital market consequences of investor information acquisition of SEC filings. The average user employs the database very few times per quarter and most users target specific filing types such as periodic accounting reports; a small subset of users employ EDGAR almost daily and access many filings. EDGAR activity is positively related with corporate events (particularly restatements, earnings announcements, and acquisition announcements), poor stock performance, and the strength of a firm’s information environment. EDGAR activity is related to, but distinct from, other proxies of investor interest such as trading volume, business press articles, and Google searches. Finally, information acquisition via EDGAR, both to obtain earnings news and to provide context for it, has a positive influence on market efficiency with respect to earnings news. Overall, our results provide a unique, user-based perspective on investor access of mandatory disclosures and its impact on price formation.

Prior literature has documented that investor attention and constraints on that attention are associated with the pricing of stocks. We introduce the concept of attention comovement, which is the extent to which investor attention for a firm is explained by attention paid to the firm’s industry and the market in general. We find that attention comovement is non-trivial for the average firm and is related to firm characteristics, such as size and visibility. We also find that the comovement of investor attention has market consequences, in that it is positively associated with excess stock return comovement. Finally, we show that a firm’s earnings announcement contributes to the transfer of attention from one firm to its peer firms. Our results provide insights about the information flows underlying return comovement and aid in understanding the micro- and macro-nature of investor attention.

We examine whether Delaware serves as a domestic tax haven. We find that taxes play an important role in determining whether U.S. firms locate subsidiaries in Delaware and that these tax factors are economically important when compared to the legal and governance factors considered in prior research. In addition, we find that U.S. firms most likely to implement a Delaware–based state tax avoidance strategy have state effective tax rates that range between 0.7 and 1.1 percentage points lower than other firms on average. The tax savings represent a 15 – 24% decrease in the state tax burden, and translate to an increase in net income of between 1.04% and 1.47%. We also find that the tax benefits of using Delaware tax strategies are diminishing over time and we provide evidence this decline is partially attributable to efforts by states to limit the multi-state tax avoidance of U.S. firms.

Offshore tax havens, such as the Cayman Islands, have been shown to facilitate corporate tax avoidance. However, academic research has overlooked the possibility that the state of Delaware could serve a similar role domestically. We find that tax factors play an important role in determining where to locate subsidiaries and that these factors are economically larger than the legal and governance factors that are typically considered important determinants of incorporation decisions. In addition, the tax savings of placing subsidiaries in the state of Delaware are economically meaningful. For firms that appear to engage in tax strategies involving Delaware, we find a reduction in the state effective tax rate of approximately 1.5 percentage points, which is similar in magnitude to the tax savings of having foreign haven operations. Our results are consistent with Delaware serving as a domestic haven against state corporate taxation.

This study examines the effects of dividend taxation on the primary parties involved in a short sale: the lender of the stock and the short seller. For stock lenders, dividend taxation is associated with a decrease in the supply of shortable shares and an increase in equity lending fees around the dividend record date. For short sellers, potential reimbursement costs are associated with a significant decrease in short volume before the ex-dividend date followed by a significant increase after the ex-date. Prior research shows that short selling improves price efficiency and formation. Hence, because of the negative effects of taxation on shorting, market quality declines along several dimensions: equity mispricing, increased loan search frictions, loan price inefficiencies and market microstructure breakdown. In sum, this study documents that taxation constricts the shorting market around the dividend dates, which in turn has negative implications for market quality.

We empirically investigate one form of illegal investor-level tax evasion and its effect on foreign portfolio investment. In particular, we examine a form of round-tripping tax evasion in which U.S. individuals hide funds in entities located in offshore tax havens and then invest those funds in U.S. securities markets. Employing Becker’s (1968) economic theory of crime, we identify the tax evasion component in foreign portfolio investment data by examining how foreign portfolio investment varies with changes in the incentives to evade and the risks of detection. To our knowledge, this is the first empirical evidence of investor-level tax evasion affecting cross-border investment in equity and debt markets.

We contribute to the debate regarding the informativeness of pro forma earnings disclosures by providing evidence that a group of informed traders, short sellers, trade as if firms’ voluntary non-GAAP earnings disclosures create information advantages they can exploit. While prior research indicates that short sellers identify firms that will experience declining operating performance, we investigate whether the disclosure of pro forma earnings acts as an indicator of future price declines that is distinct from poor operating performance. We find that short selling is significantly higher in quarters in which firms disclose non-GAAP earnings metrics relative to quarters in which they do not disclose adjusted earnings measures. Moreover, we find that short selling is significantly positively associated with the exclusion of recurring items and, more particularly, with the exclusion of stock-based compensation. We also find some evidence that short sellers trade more when managers exclude expense items to appear to meet analysts’ expectations on a pro forma basis when they fall short of expectations based on GAAP operating earnings. Finally, we find evidence based on abnormal returns suggesting that short sellers profit from short selling around earnings announcements containing pro forma earnings disclosures. Overall, the results are consistent with the notion that sophisticated market participants view pro forma earnings disclosures negatively and trade in order to take advantage of potential information asymmetries created by these disclosures.

We use the 2008 short selling regulations to conduct the first test of Diamond and Verrecchia’s (1987) counterintuitive prediction that short sale constraints can actually increase the information content of short sales. The emergency order made it difficult and costly for short sellers without strong broker relationships to borrow shares; borrowing fees increased by over 500%. Similarly, the short selling ban prohibited short selling in the spot market, but sophisticated traders could still short synthetically via the options market. As such, there is good reason to expect that both regulations increased the proportion of informed short sellers. Consistent with this notion, we find that the price reaction to announcements of unexpectedly high levels of short interest became more negative when the regulations were in effect. We also find that the price impact of short sales increased during the ban for affected stocks. Our results confirm the counterintuitive and previously untested prediction that short selling restrictions may actually increase the information content of short selling.