Working Papers

Tax Policy Expectations and Firm Behavior: Evidence from the 2016 U.S. Election and Tax Cuts and Jobs Act
with Stephan Hollander, Martin Jacob, and Xiang Zheng | June 2021

We examine how tax policy expectations evolve around and shape firm responses to a change in tax policy. Our study is motivated by recent research which suggests that bias arising from unmeasured policy expectations can confound inferences regarding the causal impact of a policy change on firm behavior, leaving the new policy’s effect largely unknown. Using a novel approach to measure firms’ expectations over tax policy and exploiting the periods around the surprise election of Donald Trump, who campaigned heavily on tax reform, and the resulting Tax Cuts and Jobs Act (TCJA), we show that these events materially affect tax policy expectations, sometimes counter to often-used conventional assumptions (e.g., we find that uncertainty over tax policy increases after Trump’s election), and exhibit substantial heterogeneity across firms. These expectations affect firm behavior in two important ways. First, we find that tax policy expectations shape firm investment prior to the passage of the TCJA, suggesting that expectations could confound researchers’ ability to attribute changes in firm behavior to the policy change itself. Second, we show that the tax reform affects firm investment through its impact on expectations over tax policy. Our findings are broadly consistent with tax policy expectations shaping firm behavior, and suggest that it is important to measure and incorporate these expectations into the analysis of tax policy.

Tax Planning Knowledge Diffusion via the Labor Market

with John Barrios | April 2021

We examine the extent to which the labor market facilitates the diffusion of tax planning knowledge across firms. Using a novel dataset of tax department employee movements between S&P 1500 firms, we find that firms experience an increase in their tax planning after hiring a tax employee from a tax aggressive firm. This finding is robust to various research designs and specifications. Consistent with tax planning knowledge driving this result, we find that the tax planning benefit of hiring an employee from a tax aggressive firm is stronger when the employee has more tax experience and is hired into a senior tax department role, and when the hiring firm likely had less tax planning knowledge prior to the hire. Further tests suggest that tax planning knowledge is highly specific in nature: the increase in tax avoidance is larger when the hiring and former firms are similar (i.e., operating in the same sector or having similar foreign operations), and firms are more likely to hire tax department employees from firms with similar characteristics. Our study documents the first-order role of the labor market in the diffusion of tax planning knowledge across firms, and suggests that tax department human capital is a central determinant of tax planning outcomes.

Featured in: Becker-Friedman InstituteChicago Booth Review

Bank Financial Reporting Opacity and Regulatory Intervention

Sole authored | February 2021

I study the association between bank financial reporting opacity, measured by delayed expected loan loss recognition, and the intervention decisions made by bank regulators. Examining U.S. commercial banks during the 2007-2009 financial crisis, I find that delayed expected loan loss recognition is negatively associated with the likelihood of regulatory intervention (measured by either severe enforcement action or closure). This result is robust to using various specifications and research designs. In additional analyses, I find evidence suggesting that this association is driven by regulators exploiting financial reporting opacity to practice forbearance. My findings contribute to the extant literature on bank opacity, regulatory forbearance, and the consequences of loan loss provisioning by suggesting that delayed expected loan loss recognition affects regulatory intervention decisions.

Featured in: Chicago Booth Review

Who CARES? Evidence on the Corporate Tax Provisions of the Coronavirus Aid, Relief, and Economic Security Act from SEC Filings

with Stephan Hollander and Martin Jacob | June 2020

We use U.S. Securities and Exchange Commission (SEC) filings to provide initial large-sample evidence regarding utilization of corporate tax provisions by U.S. firms under the Coronavirus Aid, Relief, and Economic Security Act (CARES). These tax provisions were intended to provide firms immediate liquidity to prevent widespread bankruptcies and layoffs in response to the COVID-19 pandemic. However, critics have argued that the provisions were poorly targeted and amounted to “giveaways” for shareholders of large corporations. We find that 38 percent of firms discuss at least one of the CARES tax provisions in their SEC filings, a result primarily attributable to the net operating loss (NOL) carryback provision. Firms experiencing lower stock returns during the COVID-19 outbreak are more likely to discuss CARES tax provisions, but not firms in states or industry sectors exhibiting large increases in unemployment. Further, we find a higher likelihood of tax provision discussions for firms with pre-pandemic losses and higher financial leverage. Finally, we document some evidence that firms facing potential reputational or political costs from discussing these tax provisions may have avoided doing so. Our analyses suggest that tax provisions under CARES were not material for most publicly-traded U.S. firms, were not likelier to benefit firms in greater need of liquidity during the pandemic, and that some firms perceived that disclosing benefits would be costly. These findings are important for policymakers as they consider additional economic relief for U.S. corporations while the coronavirus pandemic lingers.

Featured in: Becker-Friedman Institute, BFI COVID Series, Bloomberg Tax