John Gallemore

REVISION: Bank Financial Reporting Opacity and Regulatory Intervention
Date Posted:Mon, 01 Mar 2021 03:24:51 -0600
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.

New: Tax Policy Beliefs and Investment: Evidence from the 2016 U.S. Election and the Tax Cuts and Jobs Act
Date Posted:Thu, 25 Feb 2021 09:38:02 -0600
We examine how beliefs about tax policy affect firms’ investment decisions. Exploiting the periods around the surprise election of Donald Trump, who campaigned heavily on tax reform, and the Tax Cuts and Jobs Act (TCJA), we find that expectations regarding tax policy have both first-moment (sentiment) and second-moment (uncertainty) effects on investment, which vary heterogeneously across events and firms. In particular, we document that tax policy sentiment (uncertainty) enhances (dampens) the change in investment around the passage of the TCJA, suggesting that these beliefs affect the ability of tax reforms to spur economic growth.

REVISION: Tax-Related Human Capital: Evidence from Employee Movements
Date Posted:Mon, 30 Nov 2020 03:41:44 -0600
Despite the human capital in corporate tax departments representing the average firm’s most direct and substantial investment in tax compliance and planning, our understanding of it is limited. Using employee movement between the tax departments of publicly-traded U.S. corporations, we shed light on the determinants and consequences of tax-related human capital. We first show that deteriorations in firm tax performance are associated with increases in the likelihood of a tax department hire from another firm, but not other sources (e.g., public accounting). Second, we find that tax departments tend to hire from firms with similar characteristics (such as industry membership), suggesting that the nature of tax-related human capital is highly specific. Finally, we document that firms exhibit meaningful increases in tax avoidance when they hire from firms which themselves were successful at avoiding taxes, consistent with employee movement being a mechanism through which tax planning ...

REVISION: Tax-Related Human Capital: Evidence from Employee Movements
Date Posted:Mon, 30 Nov 2020 03:41:22 -0600
Despite the human capital in corporate tax departments representing the average firm’s most direct and substantial investment in tax compliance and planning, our understanding of it is limited. Using employee movement between the tax departments of publicly-traded U.S. corporations, we shed light on the determinants and consequences of tax-related human capital. We first show that deteriorations in firm tax performance are associated with increases in the likelihood of a tax department hire from another firm, but not other sources (e.g., public accounting). Second, we find that tax departments tend to hire from firms with similar characteristics (such as industry membership), suggesting that the nature of tax-related human capital is highly specific. Finally, we document that firms exhibit meaningful increases in tax avoidance when they hire from firms which themselves were successful at avoiding taxes, consistent with employee movement being a mechanism through which tax planning ...

REVISION: Tax-Related Human Capital: Evidence from Employee Movements
Date Posted:Sat, 28 Nov 2020 05:54:46 -0600
Despite the human capital in corporate tax departments representing the average firm’s most direct and substantial investment in tax compliance and planning, our understanding of it is limited. Using employee movement between the tax departments of publicly-traded U.S. corporations, we shed light on the determinants and consequences of tax-related human capital. We first show that deteriorations in firm tax performance are associated with increases in the likelihood of a tax department hire from another firm, but not other sources (e.g., public accounting). Second, we find that tax departments tend to hire from firms with similar characteristics (such as industry membership), suggesting that the nature of tax-related human capital is highly specific. Finally, we document that firms exhibit meaningful increases in tax avoidance when they hire from firms which themselves were successful at avoiding taxes, consistent with employee movement being a mechanism through which tax planning ...

REVISION: Corporate Tax Enforcement Externalities and the Banking Sector
Date Posted:Wed, 23 Sep 2020 02:59:24 -0500
We explore whether corporate tax enforcement can affect bank lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their information environments, which in turn could lead to increased bank commercial lending. Exploiting the regional structure employed by the IRS until 1999, we find that the corporate tax return audit probability for SMEs is associated with greater commercial lending growth for regionally focused banks. We find similar evidence when exploiting the IRS reorganization from a regional to federal system in 2000 as an exogenous change to tax enforcement at the district level. Further results show that tax enforcement’s impact on SME informational environments is at least partially responsible for this association: the impact of tax auditing on bank lending is stronger for banks facing greater informational disadvantages and in areas where SMEs face greater hold-up problems. Finally, we find that the ...

REVISION: Corporate Tax Enforcement Externalities and the Banking Sector
Date Posted:Mon, 14 Sep 2020 03:19:41 -0500
We explore whether corporate tax enforcement can affect bank lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their information environments, which in turn could lead to increased bank commercial lending. Exploiting the regional structure employed by the IRS until 1999, we find that the corporate tax return audit probability for SMEs is associated with greater commercial lending growth for regionally focused banks. We find similar evidence when exploiting the IRS reorganization from a regional to federal system in 2000 as an exogenous change to tax enforcement at the district level. Further results show that tax enforcement’s impact on SME informational environments is at least partially responsible for this association: the impact of tax auditing on bank lending is stronger for banks facing greater informational disadvantages and in areas where SMEs face greater hold-up problems. Finally, we find that the ...

REVISION: Corporate Tax Enforcement Externalities and the Banking Sector
Date Posted:Fri, 11 Sep 2020 11:35:22 -0500
We explore whether corporate tax enforcement can affect bank lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their information environments, which in turn could lead to increased bank commercial lending. Exploiting the regional structure employed by the IRS until 1999, we find that the corporate tax return audit probability for SMEs is associated with greater commercial lending growth for regionally focused banks. We find similar evidence when exploiting the IRS reorganization from a regional to federal system in 2000 as an exogenous change to tax enforcement at the district level. Further results show that tax enforcement’s impact on SME informational environments is at least partially responsible for this association: the impact of tax auditing on bank lending is stronger for banks facing greater informational disadvantages and in areas where SMEs face greater hold-up problems. Finally, we find that the ...

REVISION: Corporate Tax Enforcement Externalities and the Banking Sector
Date Posted:Thu, 10 Sep 2020 03:45:40 -0500
We explore whether corporate tax enforcement can affect bank lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their information environments, which in turn could lead to increased bank commercial lending. Exploiting the regional structure employed by the IRS until 1999, we find that the corporate tax return audit probability for SMEs is associated with greater commercial lending growth for regionally focused banks. We find similar evidence when exploiting the IRS reorganization from a regional to federal system in 2000 as an exogenous change to tax enforcement at the district level. Further results show that tax enforcement’s impact on SME informational environments is at least partially responsible for this association: the impact of tax auditing on bank lending is stronger for banks facing greater informational disadvantages and in areas where SMEs face greater hold-up problems. Finally, we find that the ...

REVISION: Bank Financial Reporting Opacity and Regulatory Intervention
Date Posted:Tue, 14 Jul 2020 03:26:04 -0500
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. 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 supporting the forbearance mechanism, but not the unawareness mechanism. My findings contribute to the extant literature on bank opacity, regulatory forbearance, and the consequences of loan loss provisioning by suggesting that ...

REVISION: Corporate Tax Enforcement Externalities and the Banking Sector
Date Posted:Thu, 09 Jul 2020 03:53:24 -0500
We explore whether corporate tax enforcement can affect bank lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their information environments, which in turn could lead to increased bank commercial lending. Exploiting the regional structure employed by the IRS until 1999, we find that the corporate tax return audit probability for SMEs is associated with greater commercial lending growth for regionally focused banks. We find similar evidence when exploiting the IRS reorganization from a regional to federal system in 2000 as an exogenous change to tax enforcement at the district level. Further results show that tax enforcement’s impact on SME informational environments is at least partially responsible for this association: the impact of tax auditing on bank lending is stronger for banks facing greater informational disadvantages and in areas where SMEs face greater hold-up problems. Finally, we find that the ...

New: Who CARES? Evidence on the Corporate Tax Provisions of the Coronavirus Aid, Relief, and Economic Security Act from SEC Filings
Date Posted:Tue, 23 Jun 2020 12:03:55 -0500
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 ...

REVISION: Bank Financial Reporting Opacity and Regulatory Intervention
Date Posted:Fri, 08 May 2020 03:34:50 -0500
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. Further tests suggest that this association is driven by financial reporting opacity facilitating regulatory forbearance, rather than inhibiting regulatory monitoring. 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.

REVISION: Corporate Tax Enforcement Externalities and the Banking Sector
Date Posted:Fri, 27 Mar 2020 10:41:14 -0500
We explore whether corporate tax enforcement can affect bank lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their information environments, which in turn could lead to increased bank commercial lending. Exploiting the regional structure employed by the IRS until 1999, we find that the corporate tax return audit probability for SMEs is associated with greater commercial lending growth for regionally focused banks. We find similar evidence when exploiting the IRS reorganization from a regional to federal system in 2000 as an exogenous change to tax enforcement at the district level. Further results show that tax enforcement’s impact on SME informational environments is at least partially responsible for this association: the impact of tax auditing on bank lending is stronger for banks facing greater informational disadvantages and in areas where SMEs face greater hold-up problems. Finally, we find that the ...

New: Banks as Tax Planning Intermediaries
Date Posted:Wed, 12 Jun 2019 18:33:01 -0500
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 ability to structure, execute, and participate in tax planning transactions for clients. We measure bank-client relationships using loan contracts and measure 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: Tax-Related Human Capital: Evidence from Employee Movements
Date Posted:Sun, 19 May 2019 16:45:31 -0500
Despite the human capital in corporate tax departments representing the average firm’s most direct and substantial investment in tax compliance and planning, our understanding of it is limited. We shed light on the determinants and consequences of tax-related human capital by examining employee movement between the tax departments of large U.S. corporations. We first show that deteriorations in firm tax performance, measured either by increases in cash effective tax rates (ETRs) or tax-related internal control weaknesses or restatements, are associated with an increased likelihood of tax department hiring. Second, we find that tax departments tend to hire from firms with similar characteristics (such as industry membership, size, and the extent of foreign operations), suggesting that tax-related human capital is highly specific in nature. Finally, we document that firms exhibit meaningful increases in tax avoidance when they hire from low ETR firms, and that this association varies ...

REVISION: Corporate Tax Enforcement Externalities and the Banking Sector
Date Posted:Sun, 19 May 2019 16:44:55 -0500
We explore whether corporate tax enforcement can affect banks via their corporate lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their governance and information environments, which in turn could lead to greater bank commercial lending. Exploiting the regional structure employed by the IRS until 1999, we find that the corporate tax return audit probability for SMEs is associated with greater commercial lending growth for regionally focused banks. We find similar evidence when exploiting the IRS reorganization from a regional to a federal-based system in 2000 as an exogenous change to tax enforcement at the district level. Furthermore, we show that this association is greater for banks facing information disadvantages, suggesting that the tax enforcement’s impact on SME information environments is at least partially responsible for our findings. Our findings are consistent with the tax authority’s mandate ...

REVISION: Tax-Related Human Capital: Evidence from Employee Movements
Date Posted:Fri, 03 May 2019 03:11:28 -0500
Despite the human capital in corporate tax departments representing the average firm’s most direct and substantial investment in tax compliance and planning, our understanding of it is limited. We shed light on the determinants and consequences of tax-related human capital by examining employee movement between the tax departments of large U.S. corporations. We first show that deteriorations in firm tax performance, measured either by increases in cash effective tax rates (ETRs) or tax-related internal control weaknesses or restatements, are associated with an increased likelihood of tax department hiring. Second, we find that tax departments tend to hire from firms with similar characteristics (such as industry membership, size, and the extent of foreign operations), suggesting that tax-related human capital is highly specific in nature. Finally, we document that firms exhibit meaningful increases in tax avoidance when they hire from low ETR firms, and that this association varies ...

REVISION: Corporate Tax Enforcement Externalities and the Banking Sector
Date Posted:Fri, 12 Apr 2019 01:16:56 -0500
We explore whether corporate tax enforcement can affect banks via their corporate lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their governance and information environments, which in turn could lead to greater commercial lending to such borrowers. Exploiting the regional structure employed by the IRS between 1992 and 1999 as well as the IRS reorganization in 2000, we find that the corporate tax return audit probability for SMEs is associated with greater commercial lending growth for regionally focused banks. Furthermore, we show that tax enforcement is associated with greater employment by SMEs in counties exposed to higher bank commercial lending. Our findings are consistent with the tax authority’s mandate having important externalities on the banking sector via the latter’s commercial lending, and suggest that the benefits to tax enforcement go beyond simply improving tax collection.

REVISION: Banks as Tax Planning Intermediaries
Date Posted:Sat, 02 Mar 2019 04:31:40 -0600
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 ability to structure, execute, and participate in tax planning transactions for clients. We measure bank-client relationships using loan contracts and measure 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: Bank Financial Reporting Opacity and Regulatory Intervention
Date Posted:Mon, 25 Feb 2019 13:45:54 -0600
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: whether financial reporting opacity inhibits the effectiveness of regulatory monitoring (regulatory unawareness) or whether regulators practice forbearance on opaque banks (regulatory forbearance). I find evidence consistent with the forbearance mechanism, but not with the unawareness mechanism. My findings contribute to the extant literature on bank opacity, regulatory forbearance, and the consequences of ...

REVISION: Bank Financial Reporting Opacity and Regulatory Intervention
Date Posted:Wed, 19 Dec 2018 04:23:23 -0600
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: whether financial reporting opacity inhibits the effectiveness of regulatory monitoring (regulatory unawareness) or whether regulators practice forbearance on opaque banks (regulatory forbearance). I find evidence consistent with the forbearance mechanism, but not with the unawareness mechanism. My findings contribute to the extant literature on bank opacity, regulatory forbearance and intervention, and the ...

REVISION: Tax-Related Human Capital: Evidence from Employee Movements
Date Posted:Mon, 10 Dec 2018 10:58:54 -0600
Despite the human capital in corporate tax departments representing the average firm’s most direct and substantial investment in tax compliance and planning, our understanding of it is limited. We shed light on the determinants and consequences of tax-related human capital by examining employee movement between the tax departments of large U.S. corporations. We first show that deteriorations in firm tax performance, measured either by increases in cash effective tax rates (ETRs) or tax-related internal control weaknesses or restatements, are associated with an increased likelihood of tax department hiring. Second, we find that tax departments tend to hire from firms with similar characteristics (such as industry membership, size, and the extent of foreign operations), suggesting that tax-related human capital is highly specific in nature. Finally, we document that firms exhibit meaningful increases in tax avoidance when they hire from low ETR firms, and that this association varies ...

REVISION: Corporate Tax Enforcement Externalities and the Banking Sector
Date Posted:Wed, 05 Dec 2018 18:49:50 -0600
Governments around the world are considering increasing corporate tax enforcement efforts to mitigate base erosion and improve revenue. Whether such enforcement efforts have externalities is not well known. In this study, we examine whether corporate tax enforcement can affect banks via their corporate lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their governance and information environments, which in turn could lead to greater commercial loan growth and better lending decisions. Exploiting the regional structure employed by the IRS between 1992 and 1999, we find that the corporate tax audit probability for SMEs is associated with greater commercial lending growth and loan portfolio quality for regionally focused banks. We find similar evidence when exploiting the IRS reorganization from a regional to a federal-based system in 2000 as an exogenous change to tax enforcement at the district level. Our ...

REVISION: Corporate Tax Enforcement Externalities and the Banking Sector
Date Posted:Thu, 29 Nov 2018 04:20:52 -0600
Governments around the world are considering increasing corporate tax enforcement efforts to mitigate base erosion and improve revenue. Whether such enforcement efforts have externalities is not well known. In this study, we examine whether corporate tax enforcement can affect banks via their corporate lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their governance and information environments, which in turn could lead to greater commercial loan growth and better lending decisions. Exploiting the regional structure employed by the IRS between 1992 and 1999, we find that the corporate tax audit probability for SMEs is associated with greater commercial lending growth and loan portfolio quality for regionally focused banks. We find similar evidence when exploiting the IRS reorganization from a regional to a federal-based system in 2000 as an exogenous change to tax enforcement at the district level. Our ...

REVISION: Corporate Tax Enforcement Externalities and the Banking Sector
Date Posted:Tue, 20 Nov 2018 17:59:28 -0600
Governments around the world are considering increasing corporate tax enforcement efforts to mitigate base erosion and improve revenue. Whether such enforcement efforts have externalities is not well known. In this study, we examine whether corporate tax enforcement can affect banks via their corporate lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their information environments, which in turn could lead to better lending decisions and greater commercial loan growth. Exploiting the regional structure employed by the IRS between 1992 and 1999, we find that the corporate tax audit probability for SMEs is associated with greater loan portfolio quality and commercial lending growth for regionally focused banks. We find similar evidence when exploiting the IRS reorganization from a regional to a federal-based system in 2000 as an exogenous change to tax enforcement at the district level. Our findings are ...

REVISION: Banks as Tax Planning Intermediaries
Date Posted:Wed, 14 Nov 2018 10:04:10 -0600
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 ability to structure, execute, and participate in tax planning transactions for clients. We measure bank-client relationships using loan contracts and measure 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: Bank Financial Reporting Opacity and Regulatory Intervention
Date Posted:Tue, 30 Oct 2018 02:29:16 -0500
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:Sat, 20 Oct 2018 03:08:26 -0500
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 ability to structure, execute, and participate in tax planning transactions for clients. We measure bank-client relationships using loan contracts and measure 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: Bank Financial Reporting Opacity and Regulatory Intervention
Date Posted:Sun, 22 Jul 2018 02:27:51 -0500
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:Sun, 22 Jul 2018 02:21:52 -0500
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: Banks as Tax Planning Intermediaries
Date Posted:Thu, 21 Dec 2017 07:11:28 -0600
We provide the first large-scale empirical evidence of banks functioning as tax planning intermediaries. We posit a role in which some banks specialize in assisting corporate clients with tax planning. In this role, banks make use of their unique features, including their centrality in important 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 lending 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 relationships with banks whose existing clients engage in above-median tax planning. The effects of pairing with such tax intermediary banks concentrate in relationships with larger loans or longer maturities, clients with foreign income or greater credit risk, and ...

REVISION: The Reputational Costs of Tax Avoidance
Date Posted:Thu, 28 Sep 2017 14:07:56 -0500
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:Thu, 28 Sep 2017 14:03:46 -0500
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:Thu, 28 Sep 2017 14:02:58 -0500
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: The Effect of Corporate Taxation on Bank Transparency: Evidence from Loan Loss Provisions
Date Posted:Sat, 07 Jan 2017 06:13:34 -0600
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: Banks as Tax Planning Intermediaries
Date Posted:Thu, 15 Dec 2016 13:15:40 -0600
We provide the first large-sample evidence of banks playing an important role in facilitating tax planning of their client firms. We posit that banks act as tax planning intermediaries, developing and implementing tax strategies for corporate clients and by facilitating such strategies’ spread across firms. Capturing bank-client relationships using lending contracts, we find that a client’s own tax planning is strongly associated with the average tax planning of its bank’s other clients. Further tests using new banking relationships show that clients experience meaningful reductions in their taxes when they begin a relationship with a bank whose existing clients engage in above-median tax planning. The effect is stronger when the new bank has above-median investment banking activities. Moreover, the effects are concentrated in clients with foreign income and those with greater credit risk and in relationships characterized by longer periods and larger lending facilities. Our results ...

REVISION: Bank Financial Reporting Opacity and Regulatory Intervention
Date Posted:Wed, 14 Sep 2016 03:41:20 -0500
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 supporting 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 loan ...

REVISION: The Effect of Corporate Taxation on Bank Transparency: Evidence from Loan Loss Provisions
Date Posted:Sun, 14 Aug 2016 08:25:25 -0500
We examine how the corporate tax system, through the tax 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. Furthermore, we show that this effect is driven by the corporate tax system encouraging timelier loan loss recognition: the extent to which future and current loan portfolio quality deteriorations are incorporated in the loan loss provision is increasing in the tax rate when general provisions are tax deductible. We also find evidence that the corporate tax system encourages provisioning by banks with capital ratios close to the regulatory requirement and in countries with relatively weak banking supervisors. Finally, we find that ...

REVISION: Banks as Tax Planning Intermediaries
Date Posted:Fri, 29 Jul 2016 10:45:19 -0500
We provide the first large-sample evidence of banks playing an important role in facilitating tax planning by client firms. Banks could be associated with client tax avoidance through two separate mechanisms. First, banks may act as tax planning intermediaries by developing and implementing tax strategies for corporate clients or by spreading tax strategies across clients. Second, banks may select borrowers in part based on their tax avoidance. Capturing bank-client relationships using lending contracts, we find that a borrower’s own tax avoidance is strongly associated with the average tax avoidance of its bank’s other borrowers. Further tests are consistent with this result being driven in part by banks acting as tax planning intermediaries. Finally, we find that borrowers experience meaningful increases in tax avoidance when they begin a new relationship with a bank whose existing borrowers are substantial tax avoiders. Overall, our results suggest that banks, in addition to being ...

REVISION: Banks As Tax Planning Intermediaries
Date Posted:Fri, 17 Jun 2016 04:23:47 -0500
We provide the first large-sample evidence of banks playing an important role in facilitating tax planning by client firms. Capturing bank-client relationships using lending contracts and measuring borrower tax avoidance with the three-year cash effective tax rate and the unrecognized tax benefit balance, we document the extent to which banks are associated with tax avoidance by corporate borrowers. In multivariate analyses, we find that the average tax avoidance of a bank’s other borrowers is an economically important determinant of a client firm’s own tax avoidance. In additional tests, we find evidence consistent with this result being driven in part by banks acting as tax planning intermediaries. Finally, we find that clients experience meaningful increases in tax avoidance when they begin a new relationship with a bank whose existing borrowers are substantial tax avoiders. Overall, our results suggest that banks, in addition to being financial intermediaries, also act as tax ...

REVISION: The Effect of Corporate Taxation on Bank Transparency: Evidence from Loan Loss Provisions
Date Posted:Tue, 16 Feb 2016 01:23:50 -0600
We examine how the corporate tax system, through the tax 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. Furthermore, we show that this effect is driven by the corporate tax system encouraging timelier loan loss recognition: the extent to which future and current loan portfolio quality deteriorations are incorporated in the loan loss provision is increasing in the tax rate when the provision is tax deductible. We also find evidence that the corporate tax system encourages provisioning by banks with capital ratios close to the regulatory requirement and in countries with relatively weak banking supervisors. Finally, we find that the ...

REVISION: The Effect of Corporate Taxation on Bank Transparency: Evidence from Loan Loss Provisions
Date Posted:Sun, 14 Feb 2016 21:15:44 -0600
We examine how the corporate tax system, through the tax 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. Furthermore, we show that this effect is driven by the corporate tax system encouraging timelier loan loss recognition: the extent to which future and current loan portfolio quality deteriorations are incorporated in the loan loss provision is increasing in the tax rate when the provision is tax deductible. Overall, our results suggest that the corporate tax system is an important determinant of timely loan loss recognition and hence the financial reporting transparency of the banking sector.

REVISION: The Importance of the Internal Information Environment for Tax Avoidance
Date Posted:Wed, 10 Sep 2014 12:52:16 -0500
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: Bank Executive Overconfidence and Delayed Expected Loss Recognition
Date Posted:Wed, 16 Oct 2013 04:56:56 -0500
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.

REVISION: The Reputational Costs of Tax Avoidance
Date Posted:Mon, 07 Oct 2013 01:42:25 -0500
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:Sun, 10 Mar 2013 09:41:04 -0500
We show that firms’ ability to avoid taxes is greatly affected by the quality of the firm’s internal information environment, with effective tax rates (ETRs) substantially lower for high internal information quality firms. Furthermore, we show that firms that experience an internal information quality improvement (reduction) are reducing (increasing) their ETRs. The effect of internal information quality on tax avoidance is strongest for firms in which information is likely to play a more ...

REVISION: The Importance of the Internal Information Environment for Tax Avoidance
Date Posted:Wed, 20 Feb 2013 17:53:17 -0600
We show that firms’ ability to avoid taxes is greatly affected by the quality of the firm’s internal information environment, with effective tax rates (ETRs) substantially lower for high internal information quality firms. Furthermore, we show that firms that experience an internal information quality improvement (reduction) are reducing (increasing) their ETRs. The effect of internal information quality on tax avoidance is strongest for firms in which information is likely to play a more ...

REVISION: The Importance of the Internal Information Environment for Tax Avoidance
Date Posted:Sat, 12 Jan 2013 14:52:00 -0600
We show that firms’ ability to avoid taxes is greatly affected by the quality of the firm’s internal information environment, with effective tax rates (ETRs) substantially lower for high internal information quality firms. Furthermore, we show that firms that experience an internal information quality improvement (reduction) are reducing (increasing) their ETRs. The effect of internal information quality on tax avoidance is strongest for firms in which information is likely to play a more ...

REVISION: Bank Executive Overconfidence and Delayed Expected Loss Recognition
Date Posted:Wed, 12 Sep 2012 07:30:35 -0500
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 ...

REVISION: The Reputational Costs of Tax Avoidance and the Under-Sheltering Puzzle
Date Posted:Tue, 17 Jan 2012 09:35:44 -0600
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 113 firms that were subject to public scrutiny for having engaged in tax shelters, representing the largest sample of publicly identified corporate tax shelters ...