Analysts, Taxes, and the Information Environment

2019 ◽  
Vol 42 (1) ◽  
pp. 103-131 ◽  
Author(s):  
Sangwan Kim ◽  
Andrew P. Schmidt ◽  
Kelly Wentland
Keyword(s):  
Accounting Information ◽  
Earnings Forecasts ◽  
Information Environment ◽  
Data Availability ◽  
Forecast Errors ◽  
Complete Understanding ◽  
The Public ◽  
Earnings Information ◽  
Earnings Components ◽  
Jel Classifications

ABSTRACT This paper investigates the extent to which analysts incorporate tax-based earnings information into their earnings forecasts relative to other earnings information. We find that analysts' misreaction to tax-based earnings information is distinct from their misreaction to other (nontax) accounting information, on average. We then show that analysts differ in their misestimation of tax and other (nontax) earnings components only when firms have weak information environments; when firms have strong information environments, analysts' forecasts fully incorporate tax-based earnings information and exhibit no difference incorporating tax-based earnings information relative to other accounting information. Our evidence suggests that, on average, forecasting tax-based earnings information is more difficult for analysts relative to forecasting other accounting information. However, access to appropriate information and resources enables analysts to better process tax information. Overall, we contribute to the literature by providing a more complete understanding of the source of analysts' tax-related forecast errors. JEL Classifications: H25; M41; D82; G14. Data Availability: Data are available from the public sources identified in the text.

How the Interplay between Financial and Nonfinancial Measures Affects Management Forecasting Behavior

2019 ◽  
Vol 31 (3) ◽  
pp. 41-63 ◽  
Author(s):  
Joseph F. Brazel ◽  
Bradley E. Lail
Keyword(s):  
Earnings Forecasts ◽  
Data Availability ◽  
Forecast Errors ◽  
Earnings Growth ◽  
Management Forecast ◽  
Nonfinancial Measures ◽  
External Stakeholders ◽  
Jel Classifications ◽  
Future Management

ABSTRACT This study examines how the interplay between financial and nonfinancial measures (NFMs) affects management forecasting behavior. Building on the knowledge that NFMs are typically aligned with actual earnings and are likely incorporated into earnings forecasts, we investigate if the level of divergence between changes in NFMs and contemporaneous changes in earnings influences management forecasting behavior. We hand collect company-specific NFMs disclosed in 10-K filings and describe how a greater divergence between NFMs and earnings (i.e., NFM changes substantially outpacing earnings growth, or vice versa) is associated with greater uncertainty about the underlying business. As such, in more divergent settings, we observe that management is less likely to issue guidance. Consistent with our theory, for managers that do provide guidance in more divergent settings, management forecast errors increase. Last, we provide evidence that external stakeholders can use the level of divergence to predict future management forecasting behavior. JEL Classifications: G14; M40; M41. Data Availability: The data used in this study are publicly available from the sources indicated in the text.

Tax-Advantaged Trust Use Among IPO Executives: Determinants and Implications for Valuation and Future Performance

2019 ◽  
Vol 95 (3) ◽  
pp. 145-175 ◽  
Author(s):  
Michael J. Dambra ◽  
Matthew Gustafson ◽  
Phillip J. Quinn
Keyword(s):  
Stock Price ◽  
Relevant Information ◽  
Data Availability ◽  
Market Prices ◽  
The Public ◽  
Future Performance ◽  
Estate Taxes ◽  
Price Appreciation ◽  
One Year ◽  
Jel Classifications

ABSTRACT We examine the prevalence and determinants of CEOs' use of tax-advantaged trusts prior to their firm's IPO. Twenty-three percent of CEOs use tax-advantaged pre-IPO trusts, and share transfers into tax-advantaged trusts are positively associated with CEO equity wealth, estate taxes, and dynastic preferences. We project that pre-IPO trust use increases CEOs' dynastic wealth by approximately $830,000, on average. We next examine a simple model's prediction that trust use will be positively related to IPO-period stock price appreciation. We find that trust use is associated with 12 percent higher one-year post-IPO returns, but is not significantly related to the IPO's valuation, filing price revision, or underpricing. This evidence is consistent with CEOs' personal finance decisions prior to the IPO containing value-relevant information that is not immediately incorporated into market prices. JEL Classifications: D14; G12; G32; M21; M41. Data Availability: Data are available from the public sources cited in the text.

Concurrent Earnings Announcements and Analysts' Information Production

2019 ◽  
Vol 95 (1) ◽  
pp. 165-189 ◽  
Author(s):  
Matthew Driskill ◽  
Marcus P. Kirk ◽  
Jennifer Wu Tucker
Keyword(s):  
Earnings Announcements ◽  
Financial Analysts ◽  
Earnings Forecasts ◽  
Data Availability ◽  
Limited Attention ◽  
Conference Calls ◽  
Stock Recommendations ◽  
Rich Information ◽  
Sample Firm ◽  
Jel Classifications

ABSTRACT We examine whether financial analysts are subject to limited attention. We find that when analysts have another firm in their coverage portfolio announcing earnings on the same day as the sample firm (a “concurrent announcement”), they are less likely to issue timely earnings forecasts for the sample firm's subsequent quarter than analysts without a concurrent announcement. Among the analysts who issue timely earnings forecasts, the thoroughness of their work decreases as their number of concurrent announcements increases. In addition, analysts are more sluggish in providing stock recommendations and less likely to ask questions in earnings conference calls as their number of concurrent announcements increases. Moreover, when analysts face concurrent announcements, they tend to allocate their limited attention to firms that already have rich information environments, leaving behind firms in need of attention. Overall, our evidence suggests that even financial analysts, who serve as information specialists, are subject to limited attention. JEL Classifications: G10; G11; G17; G14. Data Availability: Data are publicly available from the sources identified in the paper.

Auditors and the Principal-Principal Agency Conflict in Family Controlled Firms

2020 ◽  
Vol 39 (4) ◽  
pp. 31-55
Author(s):  
Chiraz Ben Ali ◽  
Sabri Boubaker ◽  
Michel Magnan
Keyword(s):  
Risk Assessment ◽  
Negative Relationship ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Risk ◽  
Controlling Shareholder ◽  
Voting Power ◽  
The Public ◽  
Agency Conflict ◽  
Jel Classifications

SUMMARY This paper examines whether multiple large shareholders (MLS) affect audit fees in firms where the largest controlling shareholder (LCS) is a family. Results show that there is a negative relationship between audit fees and the presence, number, and voting power of MLS. This is consistent with the view that auditors consider MLS as playing a monitoring role over the LCS, mitigating the potential for expropriation by the LCS. Therefore, our evidence suggests that auditors reduce their audit risk assessment and audit effort and ultimately audit fees in family controlled firms with MLS. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G32; G34; M42; D86.

Compensation Disclosures and Corporate Governance through Shareholder Voting

2019 ◽  
Vol 32 (3) ◽  
pp. 27-48 ◽  
Author(s):  
Brian Cadman ◽  
Richard Carrizosa ◽  
Xiaoxia Peng
Keyword(s):  
Corporate Governance ◽  
Fair Value ◽  
Data Availability ◽  
Shareholder Voting ◽  
Compensation Committee ◽  
The Public ◽  
Equity Compensation ◽  
Ceo Pay ◽  
Jel Classifications

ABSTRACT There are several measures of equity compensation that may provide shareholders with distinct and useful information for evaluating CEO pay. We examine whether shareholders consider additional disclosures of equity compensation measures beyond the grant date fair value when participating in corporate governance. We find that CEO equity compensation expense, a distinct measure of equity compensation, is a determinant of shareholder voting for management sponsored equity plans and voting for directors that serve on the compensation committee. After controlling for ISS recommendations, we find that voting outcomes remain significantly related to abnormal equity compensation expense. Consistent with shareholders considering the equity compensation expense, we document that firms shorten equity compensation vesting periods when they are no longer required to disclose the equity compensation expense. Our findings suggest that shareholders rely on multiple, distinct measures of equity compensation when participating in corporate governance. JEL Classifications: M12; M52; G34. Data Availability: Data are available from the public sources cited in the text.

Revisiting the (Mis)Pricing of Accruals

2019 ◽  
Vol 4 (1) ◽  
pp. 141-156
Author(s):  
Bradley Lail ◽  
Robert C. Lipe ◽  
Han S. Yi
Keyword(s):  
Stock Returns ◽  
Null Hypothesis ◽  
Statistical Tests ◽  
Cash Flows ◽  
Data Availability ◽  
Investor Behavior ◽  
Reliability Measures ◽  
Accrual Anomaly ◽  
Earnings Components ◽  
Jel Classifications

Our paper examines inconsistent conclusions regarding the accrual anomaly and demonstrates the importance of aligning regression specifications with hypotheses. Richardson, Sloan, Soliman, and Tuna (2005) conclude that accruals are mispriced and the mispricing seems to increase as accrual reliability decreases. Barone and Magilke (2009) and Ball, Gerakos, Linnainmaa, and Nikolaev (2016) conclude that cash flows rather than accruals are mispriced. We show that the divergent conclusions come from misalignment between the null hypothesis and regression specification in Richardson et al. (2005) . In addition, analysis of the contemporaneous relations between stock returns and components of earnings supports an initial underreaction to cash flows by investors. We fail to detect links between the reliability measures in Richardson et al. (2005) and investor behavior once we align the statistical tests with the null hypothesis. Our reexamination of prior findings benefits accounting academics, standard setters, and others interested in how investors use earnings components. JEL Classifications: M41. Data Availability: All data used in this study are publicly available from the sources identified in the text.

Friends in Need Are Friends Indeed: An Analysis of Social Ties between Financial Analysts and Mutual Fund Managers

2018 ◽  
Vol 94 (1) ◽  
pp. 153-181 ◽  
Author(s):  
Zhaoyang Gu ◽  
Zengquan Li ◽  
Yong George Yang ◽  
Guangqing Li
Keyword(s):  
Mutual Fund ◽  
Social Ties ◽  
Financial Analysts ◽  
Data Availability ◽  
Fund Manager ◽  
Mutual Fund Managers ◽  
Business Decisions ◽  
The Public ◽  
Fund Managers ◽  
Jel Classifications

ABSTRACT We examine how hometown, school, and workplace ties between financial analysts and mutual fund managers affect their business decisions. We show that a fund manager is more likely to hold stocks covered by analysts with whom she is socially connected, and that she also makes higher profits from these holdings. Such social tie-related holding returns are higher among more opaque firms. In return, a fund manager tends to cast her star analyst votes in favor of her connected analysts, and her fund company is more likely to allocate trading commissions to her connected analysts' brokerages. Additional tests indicate that analysts more actively acquire information (through conducting corporate site visits) and issue more optimistically biased recommendations for stocks held by fund managers with whom they are connected. Overall, our results illustrate the pronounced influence of social networks on the behaviors of analysts and fund managers. JEL Classifications: G10; G23; M40. Data Availability: Data are available from the public sources cited in the text.

Investor Sentiment for Corporate Social Performance

2018 ◽  
Vol 94 (4) ◽  
pp. 401-420 ◽  
Author(s):  
James P. Naughton ◽  
Clare Wang ◽  
Ira Yeung
Keyword(s):  
Corporate Social Performance ◽  
Social Performance ◽  
Abnormal Returns ◽  
Investor Sentiment ◽  
Data Availability ◽  
Time Varying ◽  
The Public ◽  
Valuation Uncertainty ◽  
Corporate Social ◽  
Jel Classifications

ABSTRACT We document time-varying investor sentiment for corporate social responsibility (CSR) performance. We show that announcements of CSR activities generate positive abnormal returns during periods when investors place a valuation premium on CSR performance. In addition, we find that firms boost CSR performance in response to investor sentiment, and that this response is more pronounced for those firms that are more inclined to respond to investor sentiment due to valuation uncertainty and investor horizon. Our results suggest that investor sentiment plays a role in firms' commitment to CSR. JEL Classifications: M41; D82; G14; G30; G31; G32; G34. Data Availability: Data are available from the public sources cited in the text.

Compensation Consultants and the Level, Composition, and Complexity of CEO Pay

2019 ◽  
Vol 95 (1) ◽  
pp. 311-341 ◽  
Author(s):  
Kevin J. Murphy ◽  
Tatiana Sandino
Keyword(s):  
Fixed Effects ◽  
Conflicts Of Interest ◽  
Data Availability ◽  
The Public ◽  
Say On Pay ◽  
Suggestive Evidence ◽  
Ceo Pay ◽  
The Impact ◽  
Equity Incentive ◽  
Jel Classifications

ABSTRACT We provide fresh evidence regarding the relation between compensation consultants and CEO pay. First, firms that employ consultants have higher-paid CEOs—this result is robust to firm fixed effects and matching on economic and governance variables. Second, while this relation is partly due to consultant conflicts of interest, it is largely explained by the impact consultants have on the composition and complexity of CEO pay plans; notably, this impact fully mediates the consultant-CEO pay relation. Third, firms with higher-paid CEOs and more complex pay plans are more likely to hire a consultant. Last, Say-on-Pay voting patterns suggest shareholders view positively the advice consultants provide, but only when consultants provide no other services. We also find suggestive evidence of boards “layering” new equity incentive plans over existing ones, thereby increasing the impact of composition and complexity on CEO pay beyond the premium the CEO would demand for bearing additional compensation risk. JEL Classifications: J33; M12; M52; M48. Data Availability: Data are available from the public sources cited in the text.

Do Donors Discount Low-Quality Accounting Information?

2012 ◽  
Vol 88 (3) ◽  
pp. 1041-1067 ◽  
Author(s):  
Michelle H. Yetman ◽  
Robert J. Yetman
Keyword(s):  
Accounting Information ◽  
Financial Data ◽  
Data Availability ◽  
Fund Balances ◽  
Complex Methods ◽  
Jel Classifications

ABSTRACT Prior research finds that donors reward nonprofits that report larger program ratios with more donations and that program ratios frequently are subject to intentional manipulation as well as unintentional errors. We examine how donors react to low-quality ratios. We find that the average donor discounts ratios that are inflated by only the simplest and most observable of methods. We then examine the effect of financial data availability on the average donor's ability to unravel inflated ratios by using the historical shift in data availability that occurred in 1997 and 1998. We find that donors began to discount ratios only after 1998. Finally, we examine whether the discount applied to program ratios varies across donor sophistication (measured as the percentage of fund balances with restrictions) and find that sophisticated donors apply incrementally larger discounts to inflated ratios and discount ratios that are inflated by more complex methods. JEL Classifications: G1; G18; G3; G38; L3; L30; L31; M4; M41; M43; M48 Data Availability: The data are available from public sources identified in this study.

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