REVISION: Bank Financial Reporting Opacity and Regulatory Intervention
Date Posted:
Jul 22,
2018
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 an extensive set of control variables and various research designs. I consider two alternative mechanisms for this association: financial reporting opacity inhibiting the effectiveness of regulatory monitoring (regulatory unawareness) or regulators practicing forbearance on opaque banks (regulatory forbearance). I find evidence consistent with the forbearance mechanism, but not the unawareness mechanism. My findings contribute to the extant literature on bank opacity, regulatory forbearance and intervention, and the consequences of ...
REVISION: Banks as Tax Planning Intermediaries
Date Posted:
Jul 22,
2018
We provide the first large-scale empirical evidence of banks functioning as tax planning intermediaries. We posit that some banks specialize in assisting corporate clients with tax planning. In this role, banks make use of their centrality in financial relationships; access to private information; and their ability to structure, execute, and participate in tax planning transactions for clients. We measure bank-client relationships using loan contracts and client tax planning using either the cash effective tax rate or the unrecognized tax benefit balance. Using a difference-in-differences design, we find that firms experience meaningful tax reductions when they begin a relationship with a bank whose existing clients engage in above-median tax planning. The effects of pairing with such tax intermediary banks are concentrated in relationships with larger or longer maturity loans, clients with foreign income or greater credit risk, and when the bank is an industry specialist or has ...
REVISION: The Reputational Costs of Tax Avoidance
Date Posted:
Sep 28,
2017
We investigate whether firms and their top executives bear reputational costs from engaging in aggressive tax avoidance activities. Prior literature has posited that reputational costs partially explain why so many firms apparently forgo the benefits of tax avoidance, the so-called “under-sheltering puzzle.” We employ a database of 118 firms that were subject to public scrutiny for having engaged in tax shelters, representing the largest sample of publicly identified corporate tax shelters analyzed to date. We examine the reputational costs that prior research has shown that firms and managers face in cases of alleged misconduct: increased CEO and CFO turnover, auditor turnover, lost sales, increased advertising costs, and decreased media reputation. Across a battery of tests, we find little evidence that firms or their top executives bear significant reputational costs as a result of being accused of engaging in tax shelter activities. Moreover, we find no decrease in firms’ tax ...
REVISION: The Importance of the Internal Information Environment for Tax Avoidance
Date Posted:
Sep 28,
2017
We show that firms’ ability to avoid taxes is affected by the quality of their internal information environment, with lower effective tax rates (ETRs) for firms that have high internal information quality. The effect of internal information quality on tax avoidance is stronger for firms in which information is likely to play a more important role. For example, firms with greater coordination needs because of a dispersed geographical presence benefit more from high internal information quality. Similarly, firms operating in a more uncertain environment benefit more from the quality of their internal information in helping them to reduce ETRs. In addition, we provide evidence that high internal information quality allows firms to achieve lower ETRs without increasing the risk of their tax strategies (as measured by ETR volatility). Overall, our study contributes to the literature on tax avoidance by providing evidence that the internal information environment of the firm is important ...
REVISION: The Effect of Corporate Taxation on Bank Transparency: Evidence from Loan Loss Provisions
Date Posted:
Sep 28,
2017
We examine how the corporate tax system, through its treatment of loan losses, affects bank financial reporting choices. Our identification strategy exploits cross-country and intertemporal variation in corporate tax rates and the tax deductibility of loan loss provisions. Using an international sample of banks, we find that the loan loss provision is increasing in the corporate tax rate for countries that permit the tax deduction of general provisions. The effect is economically significant: when allowing general provision deductibility, a 1 percentage point increase in the corporate tax rate leads to an increase in provisions of approximately 4.9% of the sample average. Furthermore, we show that this effect is driven by the corporate tax system’s encouragement of timelier loan loss recognition: the extent to which future and current loan portfolio quality deteriorations are incorporated into the loan loss provision is increasing in the tax rate when general provisions are tax ...
REVISION: Bank Executive Overconfidence and Delayed Expected Loss Recognition
Date Posted:
Oct 16,
2013
While prior work shows that delayed expected loan loss recognition is related to lending propensity (Beatty and Liao, 2011), bank risk (Bushman and Williams, 2011), and bank risk taking (Bushman and Williams, 2012), we provide evidence that executive overconfidence is a potential driver of delayed expected loan loss recognition. We find that overconfident bank CEOs and CFOs recognize lower loan loss provisions and incorporate current and future deterioration in nonperforming loans in their loan loss provisions less than other bank CEOs and CFOs. Our evidence of delayed expected loss recognition is driven primarily by CFOs, consistent with CFOs being closer to the financial reporting function than CEOs. The study is important because it demonstrates that manager characteristics can have meaningful economic consequences for financial institutions through the reporting of asset risk.