PurposeAudit regulations suggest that auditors consider insider trading as part of their assessment of and response to the risk of material misstatement as insider trading provides information about audit-relevant outcomes such as weak internal controls and fraud. The authors investigate whether audit fees reflect the increased risk revealed and more audit effort induced by insider selling.Design/methodology/approachThis study uses empirical analysis with OLS.FindingsThe authors find that relative to companies with net insider buying, audit fees are higher among companies with net insider selling, especially when the insiders are officers. In addition, the authors find more audit effort is needed when a large, accelerated filer changes to a net insider seller. We further find that the value of total insider purchase is negatively related to audit fees among companies of net insider buying.Originality/valueCollectively, the findings suggest that auditors' risk assessments and effort are sensitive to information reflected in insider trading, consistent with regulatory recommendations for auditors to consider nontraditional risk characteristics.

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We examine the impact of mandatory private country-by-country reporting (CbCR)—a widely adopted tax transparency initiative—on mergers and acquisitions (M&As). Using difference-in-differences and regression discontinuity designs, we find that takeover premiums decline for affected targets after CbCR adoption relative to unaffected targets. This result is consistent with CbCR providing incremental information to acquirers and reducing information frictions during the negotiation and due diligence process. The reduction in premiums is more pronounced when CbCR provides additional information beyond publicly available subsidiary-level financial data and among ex ante tax-aggressive targets. Consistent with CbCR reducing information frictions, we also observe a higher percentage of consideration paid in cash, shorter due diligence, and improved post-acquisition performance for affected targets. Our study highlights the role of CbCR in mitigating information frictions in M&As, illustrating the spillover effects of mandatory private tax disclosure beyond tax authorities to a specific group of investors—M&A acquirers.

Disclosure theory predicts that the likelihood of voluntary disclosures increases with the noise level in mandatory disclosures. We test this prediction by exploiting a unique setting where firms simultaneously provide two forecasts of the same metric-annual effective tax rates (ETRs). We find that managers are more likely to issue voluntary ETR forecasts when mandatory ETR forecasts contain more noise due to tax complexity, suggesting that managers resort to voluntary disclosure when mandatory disclosure constrains their ability to convey private information. Using analysts' ETR forecast revisions to assess the informativeness of the two ETR forecasts, we find that both forecasts are incrementally informative. In addition, analysts weight voluntary ETR forecasts more heavily, especially when voluntary ETR forecasts are non-GAAP based and when discrete items are present. Overall, we provide evidence on the relation between and the informativeness of voluntary and mandatory disclosures by examining two competing forecasts issued simultaneously.

Economic theory suggests that it is efficient for participant lenders to delegate ex ante borrower screening to lead arrangers in syndicated loans, because it is costly for syndicate participant lenders to duplicate lead arranger efforts by directly collecting borrower information. However, such delegation introduces information risk between lead arrangers and participant lenders. We investigate whether syndicate participant lenders overcome this friction by independently obtaining borrower accounting reports to supplement the information provided by lead arrangers. Employing a sample of banks that use EDGAR, we find that an individual participant lender’s search of borrowers’ EDGAR filings during the syndication period is positively associated with that participant lender’s share of the loan at the end of the syndication period. Further tests provide evidence that the key mechanism is mitigation of lead arranger information risk. This novel evidence enhances our understanding of how participant lenders’ information acquisition facilitates deal formation in syndicated loan markets.

This study examines short selling as one external determinant of corporate tax avoidance. Prior research suggests that short sellers have information advantages over retail investors, and high short-interest levels are a bearish signal of targeted stock prices. As a result, when short-interest levels are high, managers have been shown to take actions to minimize the negative effect of high short interest on firms' stock prices. Tax-avoidance activities may convey a signal of bad news (i.e., high stock price crash risk). We predict that, when short-interest levels are high, managers possess incentives to reduce firm tax avoidance in order to reduce the associated stock price crash risk. Consistent with this prediction, we find that short interest is negatively associated with subsequent tax-avoidance levels. This effect is incremental to other factors identified by prior research. We conclude that short selling significantly constrains corporate tax avoidance.

We address whether retail investors use SEC filings when making trading decisions. We find that retail investor trading, both buying and selling, is significantly related to EDGAR search for 10-K and 10-Q filings, more so than to Google search. This is true for firms with high or low visibility, firm-days with and without press coverage, and during or excluding earnings-announcement and filing windows. The results of lead-lag and two-stage-least square analyses are consistent with search leading to trade. In addition, the direction of retail investors’ trading is consistent with the direction of earnings changes reported in the downloaded filings, suggesting that retail investor trading direction is influenced by the accounting information they read in the filings. We also find that the significantly positive relation between retail trading and EDGAR search is strongest for the most easily readable 10-K and 10-Q filings. Finally, we find that retail investor trading-predicted returns are higher on days with heavier EDGAR search, consistent with retail investors making more profitable, or at least less loss making, trades when doing more research on EDGAR. Overall, our results provide strong evidence that retail investors use EDGAR filings data in making their trading decisions.

Audit regulations require auditors to consider insider trading as part of their assessment of and response to the risk of material misstatement. Moreover, empirical research finds that net insider selling provides information about audit-relevant outcomes such as weak internal controls and fraud. Thus, we investigate whether audit fees reflect the increased risk revealed by insider trading. Consistent with our expectations, we find that audit fees are higher among companies with net insider selling, relative to companies with net insider buying. Further analyses find that the positive association between audit fees and net insider selling is driven by officer net selling and that the magnitude increases with the extent of officers’ net selling activity. In addition, audit fees are higher when the number of requests for Form 4 in the SEC EDGAR online system is higher. And audit fees are sensitive to the number of requests for both recent and historical Form 4. Collectively, these results suggest that auditors’ risk assessments are sensitive to information reflected in insider trading, consistent with regulatory requirements for auditors to consider non-traditional risk characteristics. In addition, our evidence suggests that auditors’ ability to process information reflected in insider trading activity is sophisticated.

ABSTRACTThis paper examines the relation between CEO inside debt holdings (pension benefits and deferred compensation) and corporate tax sheltering. Because inside debt holdings are generally unsecured and unfunded liabilities of the firm, CEOs are exposed to risk similar to that faced by outside creditors. As such, theory (Jensen and Meckling [1976]) suggests that inside debt holdings negatively impact CEO risk‐appetite. To the extent that corporate tax shelters are likely to result in high cash flow volatility in the future, we expect that inside debt holdings will curb CEOs from engaging in tax shelter transactions. Consistent with the prediction, we document a negative association between CEO inside debt holdings and tax sheltering. Additional analyses suggest that the effect of inside debt on tax sheltering is more (less) pronounced in the presence of high default risk and liquidity threats (cash‐out options in pension packages). Overall, our results highlight the importance of investigating the implication of CEO debt‐like compensation for corporate tax policies.

We examine the impact of distance on internet search, and the effect of the "local bias'' in search on the stock market response around earnings announcements. We find significant local bias in search behavior. Motivated by theories explaining local bias, local information advantage, and familiarity bias, we predict and find that firms with higher local bias in search experience higher bid-ask spreads, lower trading volumes, and lower earnings response coefficients at the time of earnings announcements, consistent with non-local investors relying more than locals on public information announcements. Consistent with local information advantage, we find that in the week prior to the announcement, firms with higher local bias have higher bid-ask spreads, higher trading volumes, and returns that are more predictive of the coming earnings surprise. Consistent with familiarity bias, firms with higher local bias in search experience stronger post-earnings announcement drift. We use unique predictions, propensity score matching, and two-stage least squares to identify the effects of local bias separately from the effects of overall visibility. Overall, we show there is significant local bias in search, and that this local bias has a significant impact on the market response around earnings announcements.

ABSTRACT We find evidence that investors misprice information contained in book-tax differences (BTDs), measured as the ratio of taxable income to book income, TI/BI. Low TI/BI predicts worse earnings growth and abnormal stock returns than high TI/BI. We find that short sellers and insiders arbitrage BTD mispricing, but the arbitrage is imperfect because of constraints on short selling and insider trading. Under SFAS No. 109 the predictability is stronger for TEMP/BI, the temporary component of TI/BI, which reflects greater managerial discretion. The results are incremental to a large set of known accruals-based anomaly predictors. We suggest that a sunshine policy of disclosing a reconciliation of book and taxable incomes can reduce mispricing of BTDs and improve capital market resource allocation. Data Availability: Data are obtained from the public sources as indicated in the text.

We examine the impact of distance on investor search behavior, and the effect of geographic dispersion of investor search on the stock market response around earnings announcements. We find significant “local bias” in Internet search behavior. While more visible firms have more geographically dispersed search, there is significant additional variation in search dispersion. Motivated by theories of network effects and psychological distance, we predict and find that firms with a higher geographic dispersion of search experience higher abnormal trading volume, lower abnormal bid-ask spreads, and larger earnings response coefficients at the time of earnings announcements, as well as weaker post-earnings-announcement drift. These results hold both cross-sectionally and when examining changes in dispersion or propensity-score matched pairs. In addition, path analysis suggests that both network effects and investor psychology are significant drivers of the return results. Overall, our results suggest that geographic proximity affects search, and that firms with more geographically dispersed search experience better market responses to earnings announcements.

I examine how the presence of domestic accounting standards of various countries affects market reactions to firms’ earnings announcements on a given day and subsequent post-earnings announcement drifts (PEAD) in U.S capital markets. Drawing from the finance and accounting literatures on investors’ limited attention bias, I posit that the presence of fewer multiple domestic GAAPs reduces investors’ cognitive burdens to analyze earnings of firms from different countries and thus results in less distraction and stock mispricing when investors respond to firms’ earnings news. I use the number of domestic GAAPs at the firm level on a given earnings announcement day as the proxy for extent of simultaneous presence of domestic GAAPs and test the incremental effects of the number of domestic GAAPs on initial market reactions to earnings and on PEAD of U.S. and non-U.S. firms. I find that the presence of fewer different domestic GAAPs yields higher earnings response coefficients and trading volume reactions to firms’ earnings news and induces a smaller incremental effect on PEAD. A hedge portfolio based on PEAD on earnings announcement days with fewer domestic GAAPs is less profitable than one based on announcement days with more domestic GAAPs. The results indicate that the presence of fewer domestic GAAPs facilitates investment decision making and improves market efficiency by mitigating investors’ limited attention bias. The findings provide the important implication for the current movement of convergence of domestic accounting standards. This is also the first paper to empirically investigate the relation between different domestic GAAPs and investors’ limited attention bias.