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Working Papers

The Sound of Uncertainty: A Computational Linguistics Approach to Examining Managerial Acoustic Uncertainty in Conference Calls

with Daniela de la Parra | March 2024

Building on the literature in linguistics and psychology showing that the manner in which individuals speak can provide context above and beyond the actual spoken words, we study whether the uncertainty expressed via the acoustic features of managerial speech in conference calls impacts analyst behavior. We predict that when managers express greater acoustic uncertainty in their responses to questions during conference calls, analysts rely less on the information provided by managers, affecting their subsequent forecasts. Using over 30,000 hours of conference call audio, we develop and validate a novel measure of managerial uncertainty based on the acoustic features of their speech. We find that when managers sound more uncertain in their responses to analyst questions, analyst forecast dispersion increases, even after accounting for characteristics of the actual language being used by managers and analysts, consistent with analysts relying less on the information conveyed via these responses and more on information idiosyncratic to the analyst. Furthermore, we find that the impact of acoustic uncertainty on analyst behavior depends on the characteristics of the questions and responses, such as the complexity of the analyst's question and the specificity and forward-looking nature of the manager's response. Finally, we find that this acoustic uncertainty is also associated with increased bid-ask spreads, a market-based measure of uncertainty, and that this is concentrated within firms with greater increases in post-conference call forecast dispersion. Our findings suggest that the uncertainty expressed in the acoustic features of managerial speech can affect market participants. Furthermore, our study creates and validates an approach to study the acoustic uncertainty of executive speech.

Tax Policy Expectations and Investment
with Stephan Hollander, Martin Jacob, and Xiang Zheng | February 2024 | Revision requested

We examine how firms’ tax policy expectations (TPE) evolve around and affect their investment response to a change in tax policy. This examination is motivated, in part, by Hennessy and Strebulaev (2020), who show analytically the importance of accounting for policy expectations in empirical tests purporting to capture the causal impact of a policy change. Using a text-based approach to measuring TPE, we document that two tax-changing events—namely, the 2016 U.S. election and the Tax Cuts and Jobs Act (TCJA)—spawned considerable within-industry and within-year variation in TPE, sometimes going against often-used conventional assumptions in prior research. Furthermore, we observe that event-induced TPE materially affects investment both before and in response to the TCJA’s passage in 2017, with its first and second moments having offsetting effects. Finally, we find that domestic firms differ from multinational firms in their investment response to TPE, with the former (latter) more likely to adjust the level (shift the country location) of their investment. Overall, our findings strongly support the idea that TPE can affect investment behavior around a tax policy change, and suggest that our methodology can be used by future research to study and incorporate TPE into their analysis of tax policy effects.

Corporate Tax System Complexity and Investment

with Harald Amberger and Jaron Wilde | February 2024 | Revision requested

Effective policymakers must balance the demands of formulating a corporate tax system that spurs economic activity (e.g., investment) while promoting a “level playing field” across firms. Balancing these tradeoffs has likely caused tax systems to become more complex over time, increasing firms’ difficulty in understanding and complying with tax regulations. We investigate the impact of tax system complexity on the responsiveness of firm-level investment to tax policy changes. Examining firm-level capital and labor investment and exploiting staggered tax rate changes across countries, we document two key findings. First, firm-level investment is less sensitive to changes in the corporate income tax rate when tax system complexity is higher, suggesting that such complexity can undermine the ability of tax policy to affect economic growth. Second, the impact of complexity on the sensitivity of investment to the tax rate varies significantly across firms, with domestic-owned, smaller, and private firms being more affected by tax system complexity. The cross-sectional disparity in the effect suggests such complexity could reduce tax system parity. Our findings collectively suggest that corporate tax system complexity can negatively impact the ability of fiscal policy to affect investment and leads to heterogeneous tax policy responses across firms.

Corporate Tax Enforcement and Business Activity

with Martin Jacob | January 2024 | Revision requested

We examine the consequences of corporate tax enforcement for business activity. Employing two different empirical approaches—a regional design and a firm-level design—we document that corporate tax enforcement is negatively associated with business activity. This association is economically significant and is robust to tests that mitigate concerns regarding endogeneity and measurement. Furthermore, we find that the negative association between tax enforcement and business activity varies substantially in the cross-section: it is stronger for regions and firms for which access to external financing sources is more restricted, for which compliance costs are likely higher, and for which the ex-ante costs of tax enforcement are greater. Furthermore, we find that tax enforcement aimed at one firm can affect the business activity of connected firms. Our findings suggest that the effects of tax enforcement on business activity are economically important and heterogeneous, which should be of interest to academics and policymakers.

Tax-induced Organizational Complexity and Executive Performance Measurement

with Eva Labro and Ginger Scanlon | October 2023

We examine how tax-induced organizational complexity (“TIOC”), which we define as the organizational complexity that would not exist in a zero-tax world, is associated with executive performance measurement. While these structures can facilitate lower tax burdens, firms need to design their performance measurement systems to encourage executives to manage the associated complexity to avoid potential negative consequences. Using firms’ subsidiary structures in tax havens and other low tax countries to measure TIOC, we document several main findings. We find that TIOC is associated with longer-term performance measurement, consistent with boards wanting executives to manage both the short-run tax benefits and longer-run costs associated with TIOC. We also find that TIOC is associated with a greater propensity to use adjusted performance metrics, consistent with firms correcting standard metrics for measurement error and bias introduced by TIOC. Finally, we find that TIOC is associated with a greater usage of unique metrics and lower similarity in metrics across the executive team, consistent with TIOC creating heterogenous activities that top managers need to monitor and manage in support of optimizing taxes. Our study contributes to the tax and managerial accounting literatures by shedding light on how firms manage TIOC via performance measurement.

More Regulators, More Tax Monitoring: Regulatory Fragmentation and Corporate Tax Burdens

with John Barrios and Yongzhao Lin | May 2023

Regulatory fragmentation, or the regulation of a single area by multiple federal agencies, has emerged as a new area of concern for firms. In this study, we investigate the impact of regulatory fragmentation on corporate tax burdens using a sample of publicly traded U.S. firms. Our findings reveal a positive association between regulatory fragmentation and corporate tax burdens, with this relationship strengthening as the overall amount of regulation increases. Furthermore, we find that the presence of external non-government monitors and firm organizational complexity mitigates the negative impact of regulatory fragmentation on corporate tax burdens. Additionally, we observe a negative association between regulatory fragmentation and IRS attention, indicating that the monitoring efforts of the IRS are influenced by monitoring activities of other government agencies. Finally, we find that the impact of regulatory fragmentation on tax burdens is mitigated during GOP administrations, suggesting that the political party in charge of regulatory oversight is important for understanding how regulatory fragmentation shapes firm behavior. These results highlight the unintended consequences of regulatory fragmentation on corporate taxes and emphasize the interconnectedness of different government agencies in monitoring firms. By shedding light on these issues, our study contributes to the ongoing debates surrounding the role of regulation in fostering economic growth and prosperity, underscoring the importance of considering the unintended consequences of regulatory overlap.

Does the Tax System Favor Superstar Firms?

with Ed Maydew | April 2023 | Revision requested

Influential research finds that economic activity is increasingly concentrated in large, highly profitable "superstar firms," potentially leading to adverse outcomes such as decreased competition and entrenchment. Acting on concerns that the tax system favors superstar firms, policymakers are increasingly targeting superstar firms with tax increases. We test the validity of the underlying assumption that superstar firms are tax advantaged, using both forward-looking and backward-looking tax burden measures. Overall, we find little evidence that superstar firms systematically pay lower taxes than their non-superstar competitors or smaller profitable firms, casting doubt on the idea that the tax system favors superstar firms.

Corporate Tax Planning and Industry Concentration

with Jesse van der Geest, Martin Jacob, and Christian Peters | March 2023

Recent research has documented that industry concentration has increased significantly over the past 25 years, with potentially negative consequences for competition, productivity, and social welfare. Some have suggested that greater corporate tax planning by industry leaders, which can provide them with a cost advantage over their competitors, has contributed to this trend. As a result, policymakers are targeting such tax planning to reduce industry concentration. We provide large-sample empirical evidence on whether tax planning is associated with industry concentration. In contrast with conventional wisdom, we find that industry leaders generally do not exhibit greater tax planning relative to their closest competitors. Furthermore, industry leader tax planning advantages do not meaningfully explain the trend in industry concentration over our sample period. Finally, we document that industries with plausibly tax planning-induced concentration do not exhibit different aggregate productivity growth than other industries. In short, our findings cast doubt on the idea that corporate tax planning is responsible for increasing industry concentration or other anti-competition industry-level outcomes in recent years.

Other Papers

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: Washington PostBloomberg Tax, Becker-Friedman Institute, BFI COVID Series

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