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We examine the properties of overprecise forecasts, i.e., forecasts with more digits after the decimal than the mode of forecasts issued by all analysts following a given firm in a given year. Contrary to conventional wisdom, we find that overprecise forecasts are less accurate than peer forecasts. The lower accuracy is related to inexperienced analysts, who tend to overweight their models and produce more specific, yet less accurate forecasts. Additional analyses indicate that analysts issue fewer overprecise forecasts as they gain experience and that experience mitigates the negative association between forecast overprecision and forecast accuracy. Forecast overprecision is also positively associated with forecast boldness and brokerage house prestige, two proxies for analyst overconfidence in their model outputs. We further document that the capital market partially sees through this inaccuracy, as stock prices react less to overprecise forecast revisions. By revealing a novel behavioral bias of sell-side analysts, our study challenges the view that form precision signals greater accuracy and informativeness. [ABSTRACT FROM AUTHOR]

We examine whether anti-corruption intensity strengthens tax enforcement effectiveness in China. Using hand-collected anti-corruption data and aggregate tax enforcement data, which include the probability of tax audits and tax deficiencies, for a sample of 11,687 firm-year observations from 2012 to 2017, we find that anti-corruption intensity increases the deterrence role and the enforcement role of tax audits. We also identify the fear effect as a possible channel through which anti-corruption intensity affects tax enforcement effectiveness. Overall, the results indicate that anti-corruption intensity can improve a revenue agency's effectiveness. [ABSTRACT FROM AUTHOR]

This study investigates whether firm-level political risk increases managers' propensity to avoid taxes. Using a measure of firm-level political risk developed by Hassan et al. (Quart J Econom 134(4):2135–2202, 2019) and several commonly used measures of tax avoidance, we find that corporate tax avoidance increases with firm-level political risk and that the main results hold in various supplemental and endogeneity tests. In cross-sectional tests, we document that the positive relationship between firm-level political risk and tax avoidance is stronger for lower levels of tax avoidance, and is weaker when firms have superior cash flow performance and higher cash holdings. In addition, we show that the positive relationship between firm-level political risk and tax avoidance is stronger during the Trump administration's trade policy changes as well as during the global financial crisis. [ABSTRACT FROM AUTHOR]

We investigate the relationship between climate risk and corporate investment in physical and organizational capital using an international sample of firms from 39 countries. Our main findings show that climate risk is positively associated with physical capital but is negatively related to organizational capital. We also explore the effects of climate vulnerability on these relationships and find that the positive relationship between climate risk and physical capital is mainly driven by climate-nonvulnerable industries, while the negative relationship between climate risk and organizational capital is principally driven by climate-vulnerable industries. Overall, our findings have significant implications for both domestic and multinational enterprises that engage in long-term investments against the background of climate change. [ABSTRACT FROM AUTHOR]

We examine the relation between borrowing firms' corporate political transparency and the cost of debt. Using a sample of S&P 500 firms over the 2012–2016 period, we document a significant negative association between firms' corporate political transparency and their cost of debt. We also find that the negative association is more pronounced when the borrowing firms are in less unionized industries and have younger executives (CEOs or board of directors). Our results are robust to a variety of sensitivity tests. [ABSTRACT FROM AUTHOR]

This paper examines the notion of strategic ignorance in an earnings management context. Managers possess less information about loans subjected to securitization and auditors are aware of this shortcoming. Consistent with managers exploiting their own ignorance strategically and using loan loss provisions (LLP) of retained seller's interest of securitized loans (SIL) more for earnings management than LLP of other loans, we find the use of LLP for income smoothing to be greater for banks that hold SIL. Moreover, the propensity to smooth income via LLP is increasing in the ratio of SIL to total loans. We also find that SIL is particularly useful for income smoothing in the fourth quarter, when greater auditor scrutiny makes it more difficult to manage earnings via LLP of non-securitized loans. [ABSTRACT FROM AUTHOR]

The prior literature indicates that financial policy (e.g., payout policy) as well as accounting policy (e.g., conservatism) can be used to address incentive problems in firms but finds mixed evidence. We conjecture that stock repurchases, an increasingly popular form of payout, and conservatism are potential mechanisms to counter managerial propensity to engage in overinvestment using free cash flows. Consequently, we expect a negative relation between repurchases and conservatism as well as a stronger negative relation between these two mechanisms in firms with high levels of free cash flows. We find results consistent with these expectations. By contrast, we find a weaker negative relation between repurchases and conservatism when CEO tenure is higher, which confirms that more entrenched CEOs have less incentives to solve the overinvestment problem. [ABSTRACT FROM AUTHOR]

We examine the implications of social trust for auditor reporting conservatism. Using a sample of listed companies in China, we find that clients located in high-trust regions are less likely to receive a non-clean audit opinion. This negative impact of social trust on auditor reporting conservatism increases (decreases) when the client's parent firm operates in a region of higher (lower) social trust, suggesting that social trust is contagious from a parent firm to its subsidiaries in a consolidated entity. We provide evidence that the trust contagion is more pronounced for clients with a higher percentage of parent-appointed directors on their boards and clients whose parent firm has fewer subsidiaries. These findings indicate that monitoring and, to a lesser extent, personnel rotation may serve as potential channels of trust contagion. We also find that the impact of trust is more pronounced when the client is located closer to its audit firm, when the client's parent firm is a state-owned enterprise or holds a higher percentage of the client's shares, and when the client is associated with greater discretionary accruals. We provide further evidence that it is client rather than auditor trustworthiness that influences auditor reporting conservatism, auditors charge trustworthy clients lower fees, and clients from high-trust regions are less likely to manipulate earnings. Overall, our evidence suggests that social trust alleviates auditor concern about client moral hazard. [ABSTRACT FROM AUTHOR]

Using an international sample of firms from 25 countries and a country-level index for societal trust, we document that societal trust is negatively associated with tax avoidance, even after controlling for other institutional determinants, such as home country legal institutions and tax system characteristics. We explore the effects of two country-level institutional characteristics—strength of legal institutions and capital market pressure—on the relation between societal trust and tax avoidance. We find that the relation between trust and tax avoidance is less pronounced when the legal institutions in a country are stronger and is more pronounced when the capital market pressure is stronger. Finally, we examine the relation between societal trust and tax evasion, an extreme and illegal form of tax avoidance. We show that societal trust is negatively related to tax evasion and the negative relation is less pronounced when legal institutions are stronger. [ABSTRACT FROM AUTHOR]

We examine the relation between innovation and financial reporting quality (FRQ) and the implications of audit quality for this relation. We first document a negative relation between innovation and FRQ. This result is consistent with greater earnings management at higher innovation firms, likely because of the more opaque information environment that gives managers the opportunity to act opportunistically. We then examine whether audit quality moderates the observed negative relation between innovation and FRQ because audit quality constrains managers’ opportunities to manage earnings. We find results consistent with the predicted moderating effect. Lastly, we verify that these findings hold in a difference-in-differences test designed around an exogenous event, state R&D tax credits. [ABSTRACT FROM AUTHOR]

We investigate whether accounting comparability is associated with the likelihood that CEO compensation is tied to relative accounting performance (e.g., return on assets). We predict that higher accounting comparability increases the risk-sharing benefit of accounting-based RPE because peer firm performance better controls for common risk in RPE firm performance. Thus, firms that have higher accounting comparability with potential performance peers will be more likely to include accounting-based RPE as a component of the total CEO compensation contract. We find support for this prediction using (1) an explicit test design that relies on the ex ante terms of CEO compensation contracts obtained from proxy disclosures, and (2) an implicit design that relies on the actual realizations of CEO compensation. To provide further evidence, we examine the association between accounting comparability and the selection of performance peers when the CEO compensation contract includes an accounting-based RPE component. We find that higher comparability between the RPE firm and a potential peer firm increases (decreases) the potential peer firm’s likelihood of being selected into (dropped from) the peer group. Cross-sectional analyses show that this association is less pronounced, or not present, when the relative performance measure is price-based (as opposed to accounting-based), indicating that these results do not merely reflect a more general role of comparability in all RPE contracts. [ABSTRACT FROM AUTHOR]

Using an international sample of firms from 32 countries, we study the relation between media independence and corporate tax aggressiveness. We measure media independence by the extent of private ownership and competition in the media industry. Using an indicator variable for tax aggressiveness when the firm’s corporate tax avoidance measure is within the top quartile of each country-industry combination, we find strong evidence that media independence is associated with a lower likelihood of tax aggressiveness, after controlling for other institutional determinants, including home-country tax system characteristics. We also find that the effect of media independence is more pronounced when the legal environment is weaker, and when the information environment is less transparent. We contribute to the business ethics literature by documenting the role of independent media as an external monitoring mechanism in constraining corporate tax aggressiveness. [ABSTRACT FROM AUTHOR]

Using an international sample of banks, we study how differences in religiosity across countries affect earnings management. Given that religiosity is a major source of morality and ethical behavior, it may reduce excessive risk taking and act as deterrence for earnings manipulations. Therefore, we predict lower earnings management in societies that have higher religiosity. Consistent with expectations, our cross-country analysis indicates that religiosity is negatively related to income-increasing earnings management for loss-avoidance and just-meeting-or-beating prior year's earnings. We also find that religiosity reduces income-increasing earnings management through abnormal loan loss provisions. In additional tests, we document that religiosity increases the information value of bank earnings, with both earnings persistence and cash flow predictability being enhanced by higher religiosity. For the crisis period analysis (i.e., 2007-2009), our evidence shows that banks in countries with higher religiosity exhibit lower probability of reporting asset deterioration and lower probability of having poor performance. [ABSTRACT FROM AUTHOR]

We examine the impact of differential incentives arising from proximity to debt covenant violation on earnings management. We reason that firms with loans close to violation or in technical default of their debt covenants have a stronger incentive to engage in earnings management than firms that are far from violating their debt covenants. We find results consistent with this expectation. Firms close to violation or in technical default of their debt covenants engage in higher levels of accounting earnings management, real earnings management, and total earnings management than far-from-violation firms. In additional analysis, we find that firms with a stronger incentive to avoid covenant violation switched from using more accounting earnings management before the Sarbanes-Oxley Act to using more real earnings management and more total earnings management afterwards. We also document that the earnings management implications of debt covenant violation are observed primarily for firms with poor credit ratings and for firms that do not meet analyst forecasts. [ABSTRACT FROM AUTHOR]

This paper investigates the relationship between CEO stock options and analysts' earnings forecast accuracy and bias. A higher level of stock options may induce managers to undertake riskier projects, to change and/or reallocate their effort, and to possibly engage in gaming (such as opportunistic earnings and disclosure management). These managerial behaviors result in an increase in the complexity of forecasting and hence, less accurate analysts' forecasts. Analysts' optimistic forecast bias may also increase as the level of stock options pay increases. Because forecast complexity increases with stock options pay, analysts, needing greater access to management's information to produce accurate forecasts, have incentives to increase the optimistic bias in their forecasts. Alternatively, a higher level of stock options pay may lead to improved disclosure because it better aligns managers' and shareholders' interests. The improved disclosure, in turn, may result in more accurate and less biased analysts' forecasts. Our empirical evidence indicates that analysts' earnings forecast accuracy decreases and forecast optimism increases as the level of CEO stock options increases. This evidence suggests that the incentive alignment effects of stock options are more than offset by the investment, effort allocation and gaming incentives induced by stock options grants to CEOs. [ABSTRACT FROM AUTHOR]

Prior research has examined several ethical questions related to executive compensation. The issues that have received most attention are whether executives’ pay is fair and justified by performance. Since more recent studies show that stock options grants constitute the single largest component in executive compensation, we examine the relations of these grants to economic determinants and corporate governance for firms in the stagnant stage of their lifecycle. We find that, on average, stock options grants comprise a significant portion of annual CEO compensation (26.4%) for stagnant firms. We also find that economic (corporate governance) factors explain less (or more) of the cross-sectional variation in stock options grants for stagnant firms than for growth firms. Furthermore, we document lower pay-performance sensitivity (i.e., weaker incentive alignment) and no improvement in future firm performance from past stock options grants to CEOs of stagnant firms. In particular, our study provides empirical evidence on some inefficiencies associated with stock options grants to CEOs of low potential (stagnant) firms, a long-standing concern of business ethics researchers (Moriarty, ; Nichols and Subramaniam, ; Perel, ). Our results also provide support for the corporate governance reforms discussed in Matsumura and Shin (), especially those proposed provisions that curtail the power of CEOs in the governance of firms. [ABSTRACT FROM AUTHOR]

Examines alternative underlying motives of bank managers in loan loss provisions to smooth reported income. Prediction of bank performance by the analytical results of Fudenberg and Tirole; Analysis of variables to explain cross-sectional differences in the level of income smoothing; Savings of bank managers on earnings.

Investigates the impact of long-term performance plans on financial analysts' forecasts of capital investment. Basis of an executive compensation of firms; Alleviation of agency costs associated with underinvestment; Prevalence of long-term performance plans in firms.

Examines bank managers' three major motivations for dicretionary behavior with respect to loan loss provisions. Signaling, income smoothing and capital management; Utilization of bank specific time-series regression approach; Relationship between discretionary behavior and hypothesized motivations.

Investigates the relationship between analysts earnings forecasts dispersion and stock price variability. Price variability for firms with high levels of forecast dispersion; Availability of the earnings announcement to investors; Implication of empirical analysis results on research design choices.