Disclosure Oversight Under Constraints: Evidence from SEC Filing Reviews (based on dissertation)
Abstract: The Securities and Exchange Commission (“SEC”) faced Congressional budget pressure, leadership turnover, and a prolonged hiring freeze from 2017-2020. I examine how these shocks to the SEC’s operating environment affect disclosure oversight using the filing review process. During this period, the SEC issues fewer comment letters, reduces the scope of reviews, and reallocates attention toward the notes to the financial statements and away from other parts of the 10-K. Despite the decrease in coverage, I find that the SEC preserves error detection within the reviews it still performs. Consistent with a decline in information available to market participants and firms’ perceived oversight, I document increases in bid–ask spreads and accrual-based earnings management. Overall, my study suggests that operating constraints lead the SEC to substitute across oversight dimensions, preserving some detection capacity while reducing broader oversight coverage and information quality.
Energy Investment Tax Credits and Environmental Outcomes: Evidence from Electric Utilities with Jesse Chan (Boston University)
Abstract: The Investment Tax Credit (ITC) is intended to encourage investment in renewable energy. We study the association between ITC claims and U.S. electricity generation and emissions from electric utilities firms from 2001 to 2022, using a stacked cohort difference-in-differences design. We find that, after claiming the ITC, firms have lower increases in total electricity generated, lower increases in electricity generated from renewable sources, and lower emissions than peers that do not claim the credit. We also observe that initiation of the ITC is associated with between 2.9% and 9.9% more electricity generated from solar-powered sources in the next five years. Overall, our analyses suggest that the ITC encourages solar generation specifically rather than broad renewable expansion and that its emissions benefits are achieved in part through an unintended decrease in economic activity.
Customer Tax Uncertainty and Supplier Investment with Tzu-Ting Chiu (NHH-Norwegian School of Economics), Pete Lisowsky (Boston University), and Simone Traini (NHH-Norwegian School of Economics)
Abstract: This study examines the link between customer firms’ tax uncertainty and their supplier firms’ investment decisions. We find that customers’ tax uncertainty, proxied by current-year additions to the reserve for unrecognized tax benefits, is associated with an increased likelihood of underinvestment and a decreased likelihood of overinvestment by suppliers. This finding implies that customers’ tax uncertainty increases suppliers’ uncertainty about investment payoffs, thereby increasing (decreasing) suppliers’ tendency to underinvest (overinvest). We further document that this relation is more pronounced for suppliers with lower inventory turnover, customers with larger trade credit, customers with higher financial constraints, and customers with lower cash flow from operations. These results suggest that when suppliers are more vulnerable to cash flow disruptions, they are more concerned about risks associated with their customers’ tax uncertainty, thus motivating underinvestment. Overall, our study provides evidence on the importance of tax uncertainty to key external stakeholders of the firm—suppliers.
Tax Surprises with Erik Beardsley (University of Illinois), Michael Donohoe (University of Illinois) and Pete Lisowsky (Boston University)
Abstract: This study examines the performance measurement of internal corporate tax departments by leveraging semi-structured interviews with experienced tax professionals. A recurring theme across interviews is the importance of minimizing tax surprises. Participants generally define tax surprises as material differences between expected and actual tax outcomes, including cash taxes paid, audit results, and financial reporting effects, especially if the possibility of a difference was not communicated to other stakeholders. Interestingly, even favorable surprises reflecting unexpected material tax savings are often described as undesirable because they undermine the reputation of the internal tax function. Mitigating such tax surprises typically involves investing in people, processes, and technology, as well as enhancing communication between the tax department and other internal functional areas. We also find substantial variation in performance evaluation metrics used across corporations and a significant influence of how the C-Suite views tax planning. Our findings contribute to a deeper understanding of how unexpected variation in tax reporting is related to the strategic role and evaluation of corporate tax departments.