This study examines whether other comprehensive income (OCI) impacts the market's processing of earnings in the context of market uncertainty/disagreement. OCI is not consistently directly associated with uncertainty. However, while higher earnings are associated with reduced uncertainty, large OCI gains and losses interact with earnings to weaken this relation. The interactive effects of OCI with earnings apply to both cash flow and accrual earnings components, and are driven by OCI components related to investments, foreign currency translation adjustments, and pension adjustments. Overall, our results suggest a negative indirect influence of large OCI items on market assessment of firms' fundamentals.

We find that stock return volatility is higher during periods of high tax policy uncertainty (TPU), even after controlling for other sources of general macroeconomic uncertainty. Tax policy uncertainty contributes to both systematic and idiosyncratic volatility, but more strongly to the systematic component. Moreover, the effect of TPU on idiosyncratic volatility varies predictably according to firm-level attributes, specifically capital structure and tax complexity. Finally, we find that tax policy uncertainty is positively (negatively) associated with cost of equity capital, bid-ask spread, and illiquidity (autocorrelation of stock returns). Overall, our results suggest that uncertainty surrounding tax policy can impose real costs on investors in the forms of higher risk premia, information asymmetry, and cost of equity capital.

This study examines whether US effective tax rates on foreign income of US multinationals (MNCs) vary according to the favorability of US macroeconomic conditions relative to those of non-US countries. We use the pre-Tax Cuts and Jobs Act of 2017 regime as our setting and present evidence that US effective tax rates on foreign earnings are higher (lower) in periods when macroeconomic conditions in the US are favorable (unfavorable) relative to those elsewhere in the world. These results imply that firms seek to maximize after-tax returns when making asset allocation decisions, even when faced with US repatriation tax costs. We provide further evidence indicating that our primary results vary predictably according to certain firm characteristics, namely the ability to acquire funds for investment through less expensive means than repatriation of foreign profits, high intangible asset intensity, and tax aggressiveness. Finally, we show that economic uncertainty in the US counters the positive effects of favorable US macroeconomic conditions on US effective tax rates on foreign earnings. Our findings have implications for the policy debate around the US taxation of foreign earnings and provide a (partial) explanation for the observed lower-than-expected levels of repatriation activity following the implementation of the Tax Cuts and Jobs Act of 2017.

We examine the stock market reaction to the Tax Cuts and Jobs Act (TCJA) of 2017 during its enactment process, focusing on its international provisions. Consistent with extant evidence, we find lower returns for high-foreign-activity firms, indicating a negative market reaction to the international provisions overall. Considering specific international provisions, we find that the market reaction was more positive (negative) for firms likely most affected by the shift to a quasi-territorial system for taxing foreign earnings (the transition tax on existing unrepatriated earnings, the tax on global intangible low-taxed income, and/or the base erosion and antiabuse tax) than for other firms. Our findings imply that investors are able to disentangle the economic implications of complex and interactive tax law changes.

This study examines the impact of tax policy uncertainty (TPU) on analysts' forecasts and managers' interim estimates of effective tax rates (ETRs). We adopt a broad definition of TPU that encompasses both the legislative and regulatory processes and perform tests to validate a news-based measure of TPU consistent with our definition. We document that (1) analysts' implied ETR forecasts are less accurate and more disperse during periods of high TPU, (2) managers' ETR estimates are less accurate during periods of high TPU, and (3) the presence of relatively inaccurate management ETR estimates strengthens the effects of TPU on analysts' ETR forecasts. We further find that firm-level tax-related complexity exacerbates the effects of TPU on analysts' and managers' ETR predictions. Overall, our results are consistent with uncertainty surrounding tax policy impairing analysts' and managers' ability to assess and predict future tax-related fundamentals, thus imposing real costs on managers and market participants.

In this study, we test for associations between measures of book-tax differences (BTDs) and measures of private bank loan costs. Our measures of bank loan costs are: (1) interest rate spreads, and (2) security requirements. Initial results suggest a positive association between variability in total BTDs, but not levels, and private debt costs. After decomposing BTDs into their permanent and temporary components, we find that temporary BTDs (levels and variability) are consistently positively associated with costs of private debt, whereas permanent BTDs are not. Further, we find that the positive relation between BTDs and costs of private debt is attenuated for high-tax-planning firms and is stronger for loan facilities in which leading lenders have high market shares. Consistent with the findings of Ayers, Laplante, and McGuire (2010), we interpret these results as indicative of BTDs generally impacting the precision of the information conveyed in the financial statements, raising concerns about earnings quality, except where the BTDs likely result from tax planning.

This study examines the effect of the Sarbanes-Oxley Act of 2002 (SOX) on accounting distortions in the context of the earnings quality of high-growth firms relative to lower-growth firms. High-growth creates unique management and reporting challenges that can contribute to accounting-related distortions. SOX, with its emphasis on financial reporting, control systems and management responsibility, could have been particularly relevant for high-growth firms with such challenges. Test results indicate a stronger reduction (weaker increase) in accounting distortions related to total accruals and book-tax differences (performance-matched modified Jones discretionary accruals) for high-growth firms from the pre- to the post-SOX period relative to lower-growth firms. Other tests indicate that the relation between accounting returns and market returns strengthened for high-growth firms in the period after SOX, but not for lower-growth firms. These results suggest greater reductions in accounting distortions and related improvements in reporting quality for high-growth firms relative to other firms coinciding with the post-SOX period.

We examine whether financial expert audit committee members tailor their approach to overseeing the corporate tax planning process according to the firm's business strategy. We predict and find that such directors encourage defender‐type firms (characterized partially by high risk aversion) to engage in more tax avoidance activities and prospector‐type firms (characterized partially by innovation and risk seeking) to scale back on tax avoidance, relative to the opposing strategy type. We also find that both accounting experts and non‐accounting financial experts on the audit committee contribute to our results to some extent, although the effects of non‐accounting financial experts present more consistently. Overall, our results suggest that financial experts on the audit committee tend to play more of an advising role for defenders and more of a monitoring role for prospectors, relative to one another.

This study examines whether and how multiple managerial entrenchment devices within a firm, specifically the structure of the board of directors and family firm status, interact to influence tax management. Using a sample of 4,000 U.S. public firm-year observations covering the period 1999–2013, we find that the classified board structure and family firm status are both negatively related with tax avoidance. However, accounting for the interaction between board structure and family firm status, we also find that the negative associations between both entrenchment measures and tax management apply only where the other entrenchment mechanism is absent. In further analysis, we find that higher levels of monitoring by institutional investors neutralize the interaction between the presence of a classified board and family firm status. Our evidence highlights that governance/monitoring mechanisms can interact in complex ways, including an offsetting effect between potentially redundant dual-level entrenchment mechanisms, to influence tax management behavior.

We examine how tax rates impact investment by corporations in the stock market. We regress changes in intercorporate investment on changes in the various individual and corporate top statutory marginal tax rates (MTRs). We find a significant negative association between changes in individual capital gains MTRs and changes in intercorporate investment, while no such association is evident for changes in either individual ordinary or dividend MTRs. These results support the notion that corporations respond to the after-tax rate of return and/or market efficiency consequences brought about by a change in individual capital gains MTRs. We find a significant positive relation between changes in intercorporate investment and changes in corporate MTRs on ordinary income. These results are consistent with corporations scaling back expansion plans and instead investing free cash flows in equity securities as MTRs increase.

We investigate whether uncertainty surrounding tax policy is associated with investors’ perceptions about the riskiness of firms’ tax avoidance strategies, controlling for other sources of general macroeconomic uncertainty. To test our prediction, we rely on long-run cash effective tax rates (ETRs) to identify firms that have maintained relatively low cash ETRs over the prior five years. We then examine how tax policy uncertainty (TPU) and tax avoidance interact in a model of firm risk. Consistent with our prediction, our results indicate that macro-level TPU is positively associated with investors’ perceptions about the riskiness of cash flows stemming from tax planning activities. We perform analyses to evaluate our measure of TPU based on how it correlates with actual tax-related legislative activity, individually and relative to other policy uncertainty indices (debt, spending, entitlements, etc.). The results of these tests provide assurance that our primary measure of interest captures tax-related policy uncertainty. Second, consistent with economic theory which suggests that macro-level policy uncertainty is a source of systematic risk to investors, we predict and find that the interaction between TPU and tax avoidance activity is concentrated primarily in systematic volatility. We further condition our interaction of interest on a proxy for low tax-related information quality (i.e., highly volatile ETRs). Consistent with Rajgopal and Venkatachalam (2011) who argue that idiosyncratic firm risk is, at some level, a function of the firm’s information environment, we find that our interaction of interest is associated with idiosyncratic volatility for firms with lower tax-related information quality.

This study examines the effect of the Sarbanes-Oxley Act of 2002 (SOX) on accounting distortions in the context of the earnings quality of high-growth firms relative to lower-growth firms. High-growth creates unique management and reporting challenges that can contribute to accounting-related distortions. SOX, with its emphasis on financial reporting, control systems, and management responsibility could have been particularly relevant for high-growth firms with such challenges. Test results indicate a stronger reduction (weaker increase) in accounting distortions related to total accruals and book-tax differences (performance-matched modified Jones discretionary accruals) for high-growth firms from the pre- to the post-SOX period relative to lower-growth firms. Other tests indicate that the relation between accounting returns and market returns strengthened for high-growth firms in the period after SOX, but not for lower-growth firms. These results suggest greater reductions in accounting distortions and related improvements in reporting quality for high-growth firms relative to other firms coinciding with the post-SOX period.

In 1952, the National Resident Matching Program (NRMP or “match”) was established to improve uniformity in residency recruitment.1 Policies require programs that participate in the match to accept current, allopathic, US, fourth-year medical students only through the match. However, independent applicants (ie, graduates of US medical schools, students and graduates of US osteopathic medical schools, Canadian medical schools, Fifth Pathway programs, or international medical schools2) may be accepted outside the match, which creates a system that some feel is inequitable.Before the NRMP, program directors offered positions to applicants increasingly earlier, which reduced the time applicants could consider options: Applicants were often forced to choose immediately between a guaranteed job versus a potentially “better” later option. In addition, some applicants accepted multiple early offers while waiting for the best offer, which thereby eliminated choices for other applicants and left some programs ultimately with open positions. By using the match, program directors and applicants accepted some limitations in exchange for overall greater security and fairness.Currently, outside match offers (“prematch”) are common in many specialties. A 2010 review reported 23% (1490 positions) in internal medicine (IM), 23% (385 positions) in preliminary surgery, 21% (704 positions) in family medicine, 21% (277 positions) in transitional years, 10% (273 positions) in pediatrics, and 7% (81 positions) in obstetrics-gynecology.3The NRMP has periodically considered plans to implement a policy whereby either individual residency programs or entire institutions would be required to recruit all or none of their residency positions through the match. Concern has been raised regarding such “all-in” policies, particularly because of recruiting practice variation, perceived fairness of the recruitment process, enforceability, and concerns that international medical graduates (IMGs) participating in the match would not be able to obtain visas in time to begin their first year.4In May 2011, the NRMP unanimously voted to implement a program-based all-in rule (ie, individual residency programs, but not entire institutions, will be required to place all positions in the match or withdraw from the match) beginning in 2013.4 The NRMP solicited feedback from the Association of Program Directors in Internal Medicine (APDIM) and other NRMP constituents regarding the all-in rule changes. This article will discuss program director responses to the 2 surveys from the APDIM and the NRMP.In 2007, and again in 2011, the APDIM Survey Committee surveyed all member programs of APDIM to explore the characteristics of programs and opinions of program directors regarding an all-in match policy. The survey instruments and summary files are available on the APDIM website (http://www.im.org/toolbox/surveys/APDIMSurveyData). Program directors were asked whether they support or oppose the all-in policy, and their reasons for their opinions in free-text responses.Responses to both surveys were tabulated, with logistic regression models fit to examine associations between program and program director covariates and disagreement with the all-in proposal. This study was approved by the Mayo Clinic Institutional Review Board.A total of 236 program directors (61.9%) responded in 2007, with 122 (51.7%) indicating their program filled some categorical positions outside the match. A total of 109 (46.2%) disagreed with the proposed all-in rule. Summaries of covariates and associations with all-in rule disagreement are displayed in table 1. After controlling for all covariates simultaneously through a multiple logistic regression model, only having more than 10% IMGs remained significantly associated with increased odds of disagreement (odds ratio [OR] = 4.76; P = .005).In 2011, 223 program directors (62.5%) responded, with 129 (57.8%) indicating their program filled positions outside the match. Seventy-nine (35.4%) disagreed with the proposed all-in rule. Summaries of covariates and associations with all-in rule disagreement are displayed in table 2. No significant associations were found.In 2011, 70 program directors responded to the question of potential consequences of the all-in policy and cited 85 expected consequences (table 3). The most commonly cited concern was that smaller, nonuniversity programs and those in geographically less-desirable areas would suffer in recruitment. Many program directors reported the all-in policy would improve fairness of recruitment for IMGs, but many also reported the cost and effort of recruitment and interviewing would increase for both programs and applicants.From these 2 surveys, discussions at APDIM meetings, and NRMP surveys targeted at program directors from multiple specialties,4 it is clear that program directors have varying opinions regarding the all-in policy. Although regional and demographic variation still exists in outside match positions, no usual demographic factors are associated with program directors' agreement with such a policy.Proponents and opponents of all-in agree that, although some applicants would benefit (eg, academically stronger IMGs and osteopathic students), other applicants may have more difficulty (eg, less-competitive US medical graduates and IMGs). There is general agreement that some programs' recruitment might be unsuccessful, and recruitment costs and effort would increase for programs and applicants who previously had outside match options. Program directors also express concerns that IMGs may not be able to secure timely visas.Supporters of the all-in policy primarily cite enhanced support for fairness and professionalism. Without an all-in policy, applicants may be pressured to make career decisions prematurely, to accept offers before having adequate opportunity to interview at all programs, and be subject to an unregulated hiring process. The US, allopathic, fourth-year medical students may sense unfairness at not having the same outside match option that independent applicants have. There are also potential risks for programs offering positions outside the match: Without regulation, programs have been left with unfilled positions after an outside match candidate withdraws acceptance of an offer.Factors driving support for outside match offers are related to program director concerns that they may not fill all available spots with highly qualified candidates and the preference for some independent residency applicants for outside match offers. The APDIM 2007 survey indicated that the outside match option appears to be more attractive to programs that rely heavily on IMGs. Smaller, nonuniversity programs and those in less-desirable geographic locations may have concerns about their ability to secure qualified candidates without the outside match option.From the independent-applicant perspective, they currently have the ability to prematch, and thus, eliminate concerns of not securing a position. However, these outside match offers have significant potential to promote lapses in ethics and professionalism by both applicants and program directors. Recent studies in multiple specialties have confirmed match agreement violations as well as other ethical and professionalism concerns. In one study,5 94% of family medicine program directors felt they needed to be dishonest with applicants to have the best possible match. Ethical transgressions have been witnessed during residency recruitment in dermatology6 and radiology.7 Radiology applicants reported more than 50% of programs were violating the match policies by misleading applicants and by pressuring them to commit early.7These violations contribute to mutual skepticism and dishonest communication between applicants and program directors8 and undermine the professionalism that the match process seeks to preserve. Outside match offers may pressure applicants to make commitments before adequate consideration and thus facilitate later retraction of these commitments with concomitant erosion of professional integrity.9In the APDIM surveys, IM program directors were more likely to support the all-in proposal in 2011 than they were in 2007. There are several possible reasons for that. The NRMP's previous all-in proposal (which was queried by the 2007 survey) would have required an entire institution to enter all of its residency positions in the match, whereas the 2011 policy limits the all-in match to individual residency programs. Program directors may recognize that institutions are likely to allow an all-in policy for individual residencies because individual program recruitment strategies may vary widely within a single institution. In addition, the visa process may have now improved sufficiently that program directors have less concern regarding IMGs beginning residency on time. Some program directors may now agree with the policy out of a sense of inevitability. Finally, increasing competitiveness for IM residency positions between 2006 and 2011 may also have swayed program director opinions (in 2011, the ratio of postgraduate year-1 positions per active US senior was 1.41, the lowest since 1999).10The issue of prematch offers is not unique to IM; 1 in 5 positions (20%) in all primary care specialties are attained via the prematch.3 Outside the Match offers contributed to the demise of the match in the late 1990s for gastroenterology fellowship positions.11 After initial abandonment, the gastroenterology match was reinstituted and has largely been successful.12The APDIM represents a diverse group of residency programs whose constituent program directors have expressed varying opinions regarding all-in NRMP match policies. The variation likely depends on many factors, including those intrinsic to programs, institutions, and geographic regions. Although many program directors prefer the consistency and fairness of the match, others have concerns that a “one size fits all” policy would benefit some programs while harming others. The NRMP has requested comments for consideration regarding policy exceptions.4 A desire for fairness for both residencies and applicants was expressed in the 2 APDIM surveys. We suggest the APDIM survey committee, other national specialty and subspecialty program director groups, and medical student advocacy organizations continue to track constituents' opinions regarding this important topic.

This study investigates whether institutional ownership levels are associated with levels of and time-series variability in book–tax differences (BTDs). Firm and year fixed-effects regression results suggest that institutional ownership is negatively associated with total, permanent, and temporary BTDs. This effect is driven primarily by permanent BTDs in the pre-SOX era but is consistently present for both permanent and temporary BTDs post-SOX. Further, this negative association is present regardless of firms' classification as “tax planners” and/or “earnings managers.” Finally, the results provide some evidence that stronger monitoring by the board and audit committee (i.e., a smaller and more independent board and a larger audit committee) is associated with lower permanent BTDs but is not consistently related with total or temporary BTDs. Overall, these findings are consistent with higher levels of institutional ownership equating to more effective monitoring of management, resulting in lower BTDs (in terms of both levels and time-series variability).

It is well known that the objectives of financial accounting and tax accounting sometimes conflict, resulting in book-tax differences (BTDs). In this study we test for associations between measures of BTDs and measures of market participants' uncertainty regarding the information conveyed in financial reports. The measures of market participant uncertainty are: (1) share turnover, (2) analyst forecast dispersion, and (3) stock return variance. We find positive associations between levels and variability of total BTDs and the three measures. After disaggregating BTDs into their permanent and temporary components, we find that both are positively associated with market uncertainty, although the permanent component of BTDs is generally more strongly and consistently associated with measures of uncertainty than is the temporary component. We interpret these results, in part, as indicative of the possible effect of uncertainty contained in BTDs, especially permanent BTDs, on the precision of the information conveyed in the financial statements.

Using fixed—effects models of state corporate income tax (SCIT) revenues that account for the endogeneity of apportionment formula weights and tax rates, we find that states with a double—weighted sales factor experience lower SCIT revenues than do states with an equally—weighted sales factor, while higher statutory tax rates are associated with higher SCIT revenues. We also find that several other tax policies have statistically and economically significant associations with SCIT revenues. Use of a throwback rule and defining business income more broadly are associated with higher SCIT revenues, while combined reporting surprisingly is not significantly associated with SCIT revenues.

ABSTRACT: This study extends prior research on the tax-motivated substitution of employee stock options (ESOs) for debt by providing evidence on the manner in which the tax status of the firm and ESOs interact to influence debt policy. Using tobit regression and a sample of 13,345 firm-year observations over the period 1993–2004, we find that firms whose expected marginal tax rates are likely to be affected by non-debt tax shields (i.e., tax-sensitive firms) substitute ESOs for debt. In contrast, we find no association between debt and ESOs for firms that are likely able to fully utilize all available tax shields without affecting their expected marginal tax rates due to their high level of profitability for tax purposes (i.e., tax-insatiable firms). These results suggest that tax status impacts the association between debt and ESOs such that the two tax shields are not substitutes for all groups of firms across tax status categories.

This study extends prior research on the tax motivated substitution of employee stock options (ESOs) for debt by providing evidence on the manner in which the tax status of the firm and ESOs interact to influence debt policy. Using tobit regression and a sample of 13,345 firm-year observations over the period 1993-2004, we find that firms whose expected marginal tax rates are likely to be affected by non-debt tax shields (i.e., tax-sensitive firms) substitute ESOs for debt. In contrast, we find no association between debt and ESOs for firms that are likely able to fully utilize all available tax shields without affecting their expected marginal tax rates due to their high level of profitability for tax purposes (i.e., tax-insatiable firms). These results suggest that tax status impacts the association between debt and ESOs such that the two tax shields are not substitutes for all groups of firms across tax status categories.