Net Operating Loss Carryforwards and Corporate Savings Policies

We examine the relation between corporate cash holdings and tax net operating loss carryforwards (NOLs). The literature demonstrates that firms should distribute cash to shareholders rather than retain it and generate passive investment income taxed at both corporate and investor levels. However, if the firm's tax rate on passive income is lower than shareholders'-as when the firm has NOLs-theory also shows that the firm should retain cash and invest on the shareholders' behalf. Consistent with this, we find that NOLs are associated with higher levels of savings; firms save an additional $0.12 to $0.17 per dollar of tax-effected NOL benefit. Furthermore, investors place a higher value on corporate cash in tax loss firms, consistent with NOLs increasing the after-tax returns on passive investments. The paper adds to the literature studying corporate financial policy responses to taxation and quantifies the role of NOLs in corporate savings decisions.

Non-Earnings Conference Calls: Content, Determinants, and Consequences

I use computational linguistic techniques to study the content, determinants, and stock market consequences of conference calls that are not held in conjunction with quarterly earnings releases (hereafter, non-earnings conference calls). I find that large firms, loss firms, firms with more volatile earnings and returns, and firms with complex operations and a greater number of analysts following hold more non-earnings conference calls. Firms with volatile earnings and greater operational complexity discuss more earnings, investment, and market-related topics in non-earnings conference calls. These results are consistent with the notion that firms facing greater informational problems hold more non-earnings conference calls. I also find that controlling for other disclosure types, non-earnings conference calls incrementally explain quarterly abnormal stock returns, suggesting that they indeed help improve firms' information environment.

Corporate Tax Preferences before and after the Tax Cuts and Jobs Act of 2017

We examine the effect of the Tax Cuts and Jobs Act of 2017 (TCJA) on corporate tax preferences and how this effect varies with firm characteristics such as financial performance. We show that the TCJA significantly reduced the extent to which a subsample of profitable firms is tax favored, but it did not change average cash tax differences for the full sample that includes firms with losses. The associations between the tax preferences of profitable firms and their characteristics were generally unaffected by the TCJA. In a sample that includes loss firms, we find that larger firms are less tax favored after the TCJA.

The Governance of Tax Audit Enforcement: Indicators on Automation Incentive, Tax Avoidance and Firm Characteristics

The intense development in the Fourth Industrial Revolution (IR 4.0) demands tight governance of tax audit enforcement by the Inland Revenue Board Malaysia (IRBM) on firms claiming automation incentive. Through tax audit enforcement, IRBM provides a monitoring mechanism for corporate governance. However, due to data confidentiality, little has been established on what indicators that caused tax authority to carry out tax audits. In this research, we employed tax return and historical audit data of corporate taxpayers consisting of profitable and loss firms which consistently claim the Reinvestment Allowance (RA) to examine the indicators applied by the tax authority in executing the role of governance. Employing Binary logistic regression, firm characteristic of firms experiencing tax audit was observable, but tax avoidance and incentive utilization indicators were not apparent. Tax avoidance indicators such as effective tax rate and book-tax difference, loss firms, and incentive utilization receive less attention when it comes to tax audit enforcement. Examining firms that experienced tax audit enforcement has enriched our understanding of indicators that draw the interest of tax authorities when it comes to tax audits. Overall, this research could be the first in Malaysia that has used actual historical tax audit record, which has revealed new evidence on the indicators preferred by the IRBM in conducting a tax audit. The slight fine-tuning of the responses, especially on tax avoidance and incentive utilization indicators for tax enforcement might produce comprehensive tax audit coverage and yield a greater mechanism for governance.

Net deferred tax assets and the long-run performance of Initial Public Offerings

On average, firms’ going public severely underperform compared to the market, a phenomenon which is widely known in the literature as IPO underperformance. Though there is no generally accepted theory on the reasons, information asymmetries and the scarcity of information on the issuers is generally considered to contribute to the phenomenon. Accounting data provided by issuers in the offering prospectuses is mostly backward-looking information that is of limited use in forming expectations of future performance. This problem becomes even more pressing, given the increasing fraction of loss firms among IPOs. Net deferred tax assets (NDTA), however, are a balance sheet item that can be expected to include forward-looking information on future earnings. Reporting under IFRS, firms may recognize NDTA only to the extent, that positive income will be available in future periods. We, therefore, expect NDTA to be positively associated with the long-run performance of IPOs. Investigating a sample of firms going public in Germany between 2005 and 2015, we find that NDTA are positively associated with long-run stock price performance. The association is particularly strong among loss firms. Our findings are relevant especially to investors, who regularly have difficulties valuing loss firms. We show that firms which recognized NDTA perform much better in the aftermarket than those that do not have NDTA on the balance sheet. The most important lesson to be learned is that IPO firms that did not recognize NDTA will likely be very poor investments.

Bloated balance sheets and stock returns: Asymmetries between profit and loss firms

We study return predictability attributable to bloated balance sheets in European capital markets and find that the NOA anomaly is more severe across loss firms and is significantly attenuated across profit firms. A hedge trading strategy on NOA for loss firms generate large raw and abnormal returns that are almost three times higher than the respective returns for profit firms. Our evidence is more likely to be consistent with the hypothesis that low NOA firms may have superior returns relative to high NOA firms due to investors’ inability to make full use of information reported in financial statements.