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The Tax Cuts and Jobs Act of 2017 (TCJA) dramatically changed U.S. taxation of foreign earnings for U.S. multinational companies (MNCs). Specifically, the TCJA required taxation of existing unremitted foreign earnings through a deemed repatriation and effectively eliminated future repatriation taxes through a 100 percent dividends received deduction. Additionally, the bill introduced the global intangible low-taxed income (GILTI) regime. We examine MNCs’ responses to the TCJA and find that spending and investment behavior depends on liquidity, investment opportunities, and borrowing costs. Domestic capital expenditures and share repurchases increased for MNCs with low domestic liquidity and high domestic investment opportunities. In contrast, MNCs with low domestic liquidity (high cost of debt) and low domestic investment opportunities increased dividends (decreased debt). Finally, we find that MNCs with high foreign cash and most vulnerable to the GILTI regime increased their foreign but not domestic capital expenditures—a potential unintended consequence. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: F23; G31; G38; H25; M40; M48.

We examine whether repatriation tax liabilities affect bond pricing using four settings: (1) pricing on a new bond issuance, (2) pricing changes around the American Jobs Creation Act of 2004 (AJCA), (3) pricing changes around the 2016 US election, and (4) pricing changes around the Tax Cuts and Jobs Act of 2017 (TCJA). The preponderance of evidence suggests that bondholders incorporate expected repatriation taxes into bond prices. However, this evidence appears concentrated around the 2004 AJCA (which created a repatriation tax holiday) and the 2016 US election (which unexpectedly increased the likelihood of a reduction in repatriation tax rates), arguably the strongest two experiments of the four. Around the 2016 US election, we find cross-sectional evidence suggesting that the positive relation between returns and repatriation tax liabilities is strongest for firms for firms that likely faced greater borrowing distortions due to repatriation taxes and for repatriation tax liabilities specifically on foreign cash. We do not find evidence that bondholders price repatriation tax liabilities on foreign earnings that have been reinvested in operating assets, suggesting that they do not price all repatriation tax liabilities equally. Overall, our results are consistent with lenders pricing when these liabilities are causing distortions in firms’ borrowing decisions and when they are more likely to be paid.

We identify an item recognized on the balance sheet that distorts the assessment of default risk. Firms enter into derivatives to protect themselves from price fluctuations on a future purchase or sale commitment denominated in a commodity, foreign currency, or interest rate. There are two reasons why the accounting for these transactions creates difficulty in default risk assessments. First, while the fair value of the derivative is recorded at each balance sheet date, the value of the forecasted purchase or sale commitment is not recorded. Therefore, the balance sheet only tells half of the economic story. Second, the gains/losses associated with these derivatives provide a signal about future firm profitability, which is a determinant of default risk. We examine the extent to which debt investors, credit analysts, and equity investors understand the implications of these transactions for a firm’s default risk. Our results suggest that all three of these groups remove derivative amounts from firms’ balance sheet ratios when assessing default risk. However, only debt investors correctly price the implications of future profitability on default risk. Overall, our results suggest that the accounting for cash flow hedges distorts a firm’s leverage and profitability ratios, that not all investors adjust for this, and that capital market participants might benefit from more transparent hedging disclosures, particularly related to profitability.

SYNOPSIS We investigate whether audit committees use voluntary disclosures to signal the committees' higher level of involvement in the audit partner-selection process, which contributes to higher levels of audit quality. Audit committees more involved in the partner-selection process should ensure the selection of a more rigorous partner. We test this conjecture by first identifying partners new to audit engagements. We then compare audit quality for companies whose audit committees disclose involvement in the selection of the new partner to those without this disclosure. We find that this disclosure is positively associated with audit quality (measured using discretionary accruals, misstatements, and meeting consensus analyst forecasts by a very small margin). Our results are more salient for complex companies and those with powerful audit committees. These findings highlight that audit committees use their disclosures to signal involvement in the partner-selection process and are relevant to the Securities and Exchange Commission. Data Availability: The data used in this paper are publicly available from the sources indicated in the text. JEL Classifications: M41; M48.

We examine the effect of high-quality information technology (IT) on management's capital investment decisions. Evaluating capital investment decisions with contemporary investment efficiency and long-term measures of investment effectiveness, we document a positive relation between high-quality IT and capital investment decision quality. In particular, we find high-quality IT is associated with more optimal levels of investment as well as fewer future fixed asset write-downs. We also disaggregate investment efficiency and find the relation with IT quality holds for investment decisions related to capital expenditures and acquisitions, but not research and development expenditures. Overall, our results suggest managers equipped with better internal information from higher-quality IT are able to make superior capital investment decisions. Our study contributes to the literature by providing evidence of a significant determinant of capital investment decision quality and documenting a specific mechanism that mediates the indirect effect of IT quality on future performance. JEL Classifications: D83; E22; G31; M15; M41. Data Availability: We thank InformationWeek for providing annual rankings that were previously published. All other data are publicly available from regulatory filings; we obtained data from the Compustat, Execucomp, and I/B/E/S databases.

As the U.S. dollar (USD) strengthens relative to foreign currencies, the USD value of foreign subsidiary-to-parent dividends decreases, and the foreign tax credit remains anchored at a blended rate. During periods of USD strength, this asymmetry lowers the effective tax cost of repatriation at the cost of a lower after-tax dividend to the U.S. parent. This paper develops a firm-specific measure of currency exposure and provides evidence that repatriation likelihood increases during periods of firm-specific USD strength. We show that investors place a premium on repatriation costs when the USD strengthens against a firm-specific basket of currencies for repatriating firms. This premium implies that investors value the benefit of a lower effective tax cost of repatriation more than the potential cost of a lower after-tax dividend available to the U.S. parent. These results appear concentrated in firms with high levels of foreign cash and firms susceptible to earnings fixation.

The Tax Cuts and Jobs Act of 2017 (TCJA) reduces U.S. multinational companies’ (MNC) internal capital market frictions related to repatriation costs by decreasing costs to access internal capital (i.e., foreign cash). This study examines MNCs’ responses to the TCJA and finds spending and investment behavior are dependent upon liquidity, investment opportunities, and borrowing costs. Domestic capital expenditures increased for MNCs with low domestic liquidity and high domestic investment opportunities. These firms also increased share repurchases. In contrast, MNCs with low domestic liquidity and low domestic investment opportunities increased dividends. MNCs with low domestic investment opportunities and high cost of debt reduced their outstanding debt. We also investigate responses to global intangible low-taxed income (GILTI) incentives and find that MNCs with more foreign cash and a greater likelihood of being affected by the GILTI regime increase their foreign but not domestic capital expenditures - a potential unintended consequence of TCJA.

The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated disincentives for U.S. multinational corporations (MNCs) to repatriate foreign subsidiaries’ earnings, but the TCJA included additional provisions that will impact U.S. firms’ acquisition decisions. We find that both the likelihood and number of domestic and foreign acquisition announcements made by U.S. firms decreased on average after the TCJA but increased with repatriation taxes that U.S. MNCs faced prior to the TCJA. This effect is stronger for those MNCs that held larger amounts of foreign cash prior to the TCJA. The post-TCJA increase in foreign target acquisitions is driven by MNCs that are more likely to be subject to the global intangible low-tax income (GILTI) provisions after the TCJA. Our results suggest that the GILTI provisions introduced a contradictory incentive for U.S. MNCs with higher returns from intangible assets to investment in foreign target firms with lower returns on tangible property.

Prior literature finds that International Financial Reporting Standards (IFRS) adopters enjoy lower financing costs subsequent to IFRS adoption. We predict and find that mandatory IFRS adopters exploit lower financing costs to increase market share vis-a-vis non-adopters. This effect is robust across several different model specifications in a sample capturing the universe of public and private firms in the EU, in a matched sample of public and private firms, and in a public firm sample comparing mandatory and voluntary IFRS adopters. We further find that IFRS is associated with an increase (decrease) in industry sales concentration (competition), consistent with large public firms increasing market share. In supplemental analyses, we find that mandatory adopters issue more equity and debt after IFRS adoption and that larger market share gains accrue to those mandatory IFRS adopters that issue more equity and debt after IFRS adoption. Overall, we provide evidence of unintended product market consequences of IFRS adoption.

SYNOPSIS We investigate the effect of mandatory International Financial Reporting Standards (IFRS) adoption in the European Union on the association between accounting estimates and future cash flows, a key concept of accounting quality within the International Accounting Standard Board conceptual framework. We find that the predictive value of accounting estimates improves after IFRS adoption. This improvement is largely driven by specific types of accounting estimates, such as accounts receivable, depreciation, and amortization expense. We also find that the improvement is concentrated in countries with larger differences between pre-IFRS domestic GAAP and IFRS. Our findings suggest that IFRS allow managers to exercise their judgment to provide information about future cash flows through the more subjective/judgmental portion of accounting accruals. JEL Classifications: M16; M49; O52. Data Availability: The data used in this study are from public sources identified in the study.

• We examine internal capital market inefficiencies and U.S. multinational firms' return of capital to shareholders.

This study examines whether firms engage in income-decreasing real earnings management before open market stock repurchases to reduce the cost of stock buybacks. In the short run, managers have the ability to underproduce inventory and increase discretionary expenditures, thus decreasing current period earnings. We find that managers engage in both of these activities before repurchasing their firms’ shares, especially the latter. Also, companies increase their discretionary spending before making repurchases to a greater extent following the passage of the Sarbanes–Oxley Act of 2002 as well as when they are financially healthy and have high marginal tax rates. Finally, we document that firms with the most income-decreasing real earnings management experience the largest positive abnormal returns during the subsequent period. Our findings highlight the importance of considering firms’ use of real operating decisions, as opposed to just opportunistic disclosure practices, around significant corporate events, such as the repurchase of their own stock.

This study examines how investors respond to firms’ disclosure practices that deviate from the majority of industry peers (i.e., industry norms). The SEC has made repeated calls for the disclosure of foreign cash in order for investors to have more information in determining firms’ liquidity positions. We examine the association between firm value and the non-disclosure of foreign cash in industries where the majority of firms choose to disclose foreign cash. We define partial disclosure as disclosing permanently reinvested earnings (PRE), but withholding the disclosure of foreign cash, and find that when the majority of industry peers disclose foreign cash, investors discount the firm-specific partial disclosure of foreign operations. This finding suggests that investors have similar information demands as the SEC, and that withholding foreign cash results in a valuation discount. We also find that this discount is more pronounced for firms predicted to have higher levels of foreign cash and higher levels of PRE. The discount in firm value is also concentrated among firms with managers who have more career concerns, suggesting that managers shift the cost of partial disclosure to shareholders instead of bearing the personal reputational cost of full disclosure. Our results are robust to multiple matched samples and entropy balancing. While previous literature has considered the valuation implications of foreign cash disclosures, we reveal the consequences of opting to withhold the disclosure of foreign cash. Our findings should be of interest to both managers and policy-setters in forming their disclosure protocols.

We identify an item recognized on the balance sheet that distorts the assessment of default risk. Firms enter into derivatives to protect themselves from price fluctuations on a future purchase or sale commitment denominated in a commodity, foreign currency, or interest rate. There are two reasons why the accounting for these transactions creates difficulty in default risk assessments. First, while the fair value of the derivative is recorded at each balance sheet date, the value of the forecasted purchase or sale commitment is not recorded. Therefore, the balance sheet only tells half of the economic story. Second, the gains/losses associated with these derivatives provide a signal about future firm profitability, which is a determinant of default risk. We examine the extent to which debt investors, credit analysts, and equity investors understand the implications of these transactions for a firm’s default risk. Our results suggest that all three of these groups remove derivative amounts from firms’ balance sheet ratios when assessing default risk. However, only debt investors correctly price the implications of future profitability on default risk. Overall, our results suggest that the accounting for cash flow hedges distorts a firm’s leverage and profitability ratios, that not all investors adjust for this, and that capital market participants might benefit from more transparent hedging disclosures, particularly related to profitability.

This study examines the incentives and consequences of inconsistent corporate disclosures about foreign operations. We provide evidence that firms with a foreign subsidiary in a tax haven country are more likely to either disclose foreign cash and withhold the disclosure of permanently reinvested earnings, or vice versa. In other words, there is a positive association between tax haven investments and the likelihood of inconsistent financial reporting disclosures. Equity market participants consider these inconsistent foreign disclosure choices when determining the value of corporate tax avoidance. We find that the inconsistent financial disclosures about foreign operations attenuate the positive association between tax avoidance and firm value. These results should be of interest to the Securities and Exchange Commission as it continues to monitor the transparency of firms’ foreign operations disclosures.

An unrealized gain on a cash flow hedge implies that the price of the underlying hedged item (i.e., commodity price, foreign currency exchange rate, or interest rate) moved in a direction that will negatively affect the firm’s profits after the hedge expires. Similarly, a loss implies that prices moved in a direction that will positively affect the firm’s profits after the hedge expires. Prior research shows that unrealized gains/losses on cash flow hedges are negatively associated with future earnings, and that investors’ expectations, as reflected in stock prices, do not appear to anticipate this association. We provide further evidence on this identified mispricing by examining whether sophisticated information intermediaries (i.e., financial analysts) understand the future earnings effects of cash flow hedges. We offer three main results. First, we find that analysts do not correctly incorporate unrealized cash flow hedging gains and losses into their earnings forecast for two- and three-year ahead earnings forecasts. Second, we find that analysts correct their errors after the cash flow hedges have largely expired (i.e., in about one year), and that investors correct their mispricing at this time. Finally, we find that when managers provide forecasts, analysts and investors are better able to process cash flow hedge information. Overall, our results suggest that the fair value accounting model for cash flow hedges combined with complex and incomplete firm disclosures results in investor mispricing, even for sophisticated investors, and that this mispricing can be mitigated if managers provide more transparent, complete, and forward-looking disclosures.