We examine the implications of GAAP earnings forecast quality for accounting research. Using a tax law change with an estimable and material GAAP earnings impact, we find that analysts’ GAAP forecasts generally fail to incorporate this impact, whereas investors respond promptly, suggesting that GAAP forecasts omit earnings information deemed relevant by investors and are of low quality. Analyzing quarterly GAAP forecasts from 2004–2019 and classifying GAAP forecasts that equal their street counterparts when GAAP and street actuals differ as low quality, we again find widespread low GAAP forecast quality. Low quality GAAP forecasts affect research inferences: they dampen GAAP earnings response coefficient (ERC) estimates, reduce the explanatory power of GAAP surprises for returns, affect inferences regarding market rewards for meeting-or-beating via exclusions, and understate the extent that GAAP forecasts incorporate exclusion components. We propose two strategies to mitigate the adverse effects of low quality GAAP forecasts on research inferences.

Governmental Accounting Standards Board Statement No. 34 (GASB 34, 1999) standardized financial reporting and disclosure requirements for U.S. state and local governments. We interpret debt issuing patterns surrounding GASB 34 implementation as evidence of strategic behavior by governments in anticipation of GASB 34 consequences. Specifically, governments that expected more favorable post-GASB 34 evaluations by municipal bond investors delayed new uninsured debt issues until after, whereas governments that expected less favorable evaluations accelerated debt issues to before, GASB 34 information became publicly available. Governments expecting favorable consequences were more likely than governments expecting adverse consequences to substitute away from insured debt and toward uninsured debt, and to choose new debt financing rather than alternative financing sources following GASB 34. These findings are consistent with the notion that expectations about GASB 34 consequences were realized, and that standardization created through GASB 34 facilitated separation in the municipal debt market.

We find that US state governments allocate economic incentive awards disproportionally to firms that are politically connected to state politicians and that these political connections distort the effectiveness of resource allocation. A connected firm is more than three times more likely than an unconnected firm to receive an incentive award, and the award amount is 51 percent larger. This relation is robust to unexpected gubernatorial departures and close gubernatorial elections for which endogeneity is less of a concern. Importantly, unconnected firms that receive awards generate 1.5–2.0 times greater future job growth, and only awards to unconnected firms are associated with job spillover to other industries and long-run aggregate local economic growth. Connected awards are more likely and larger when politicians’ motives appear self-serving. Collectively these findings suggest that awarding economic incentives to politically connected firms is not an effective use of state taxpayers’ funds.

The provision of non-audit services (NAS) to audit clients can generate knowledge spillovers that enhance auditors’ judgments or self-review and self-interest threats that impair auditors’ independence. Prior research finds mixed evidence of a relation between tax NAS and clients’ (actual and potential) material GAAP violations in accounting for income taxes. As auditors are likely to avoid material GAAP violations, we re-examine this issue using a measure that reflects immaterial or within-GAAP estimation error in clients’ income tax expense. We find that greater amounts of tax NAS are associated with greater income tax estimation error, consistent with tax NAS threating auditors’ independence. The association is partially offset by auditor expertise and concentrated in engagements where auditors face both self-review and self-interest threats. Our findings inform the ongoing policy debate regarding whether accounting firms should provide tax NAS to their audit clients.

Dhaliwal et al. (2022) (hereafter DGHS) examine whether firms incur tax-related reputational costs by focusing on the year 2011 —a period of U.S. socioeconomic unrest characterized by widespread protests. The authors present findings consistent with the media and investors imposing tax-related reputational costs on firms, and firms responding to and managing these tax-related reputational costs. My discussion of DGHS focuses on two primary observations: the validity of 2011 as a setting for identifying tax-related reputational costs, and challenges associated with measuring tax-related reputational costs. DGHS contribute to the taxavoidance literature by furthering our understanding of whether and when tax-related reputational costs exist. More broadly, the paper highlights the need to consider whether, and more importantly why, time-series variation in the relation between dependent and independent variables exists. I applaud the authors for tackling an important research question and introducing key aspects of sociology research into the accounting literature.

An extensive literature examines the causes and effects of financial misconduct based on samples drawn from four popular databases that identify restatements, securities class action lawsuits, and Accounting and Auditing Enforcement Releases (AAERs). We show that the results from empirical tests can depend on which database is accessed. To examine the causes of such discrepancies, we compare the information in each database to a detailed sample of 1,243 case histories in which regulators brought enforcement actions for financial misrepresentation. These comparisons allow us to identify, measure, and estimate the economic importance of four features of each database that affect inferences from empirical tests. We show the extent to which each database is subject to these concerns and offer suggestions for researchers using these databases.

We quantify measurable benefits and costs of exempting firms from auditor oversight of internal control effectiveness disclosures.We measure the benefit of exemption as an aggregate $388 million in audit fee savings from 2007–2014. The costs stem from internal control misreporting: an aggregate $719 million of lower operating performance due to non-remediation and a $935 million delay in aggregate market value decline due to the failure to disclose ineffective internal controls. The audit fee savings benefit shareholders of all exempt firms, whereas the costs are borne by shareholders of only a fraction of exempt firms (the internal control misreporters).

Most prior studies model tax avoidance as a function of firm-level characteristics and do not consider how individual executive characteristics affect tax avoidance. This paper investigates whether executives with superior ability to efficiently manage corporate resources engage in greater tax avoidance. Our results show that moving from the lower to upper quartile of managerial ability is associated with a 3.15% (2.50%) reduction in a firm’s one-year (five-year) cash effective tax rate. We examine how higher-ability managers reduce income tax payments and find that they engage in greater state tax planning activities, shift more income to foreign tax havens, make more research and development credit claims, and make greater investments in assets that generate accelerated depreciation deductions. Identifying a manager characteristic related to firms’ tax policy decisions adds to our understanding of the factors that explain the substantial variation in corporate income tax payments across firms.

We investigate why extreme positive earnings surprises occur and the consequences of these events. We posit that managers know before analysts when extremely good earnings news is developing, but can have incentives to allow the earnings news to surprise the market at the earnings announcement. In particular, managers can use an extreme positive earnings surprise to attract investor attention when they believe their stock is neglected and future performance is expected to be strong. Analysts, who must allocate scarce resources across many firms, can also be inattentive and miss signals that suggest good performance is going to be announced. Using various proxies for extreme positive earnings surprises, management expectations for future performance and desire for attention, and analyst neglect, we find evidence that an extreme positive earnings surprise is a predictable event. These findings are incremental to controlling for a firm’s information environment, earnings volatility, and operating leverage. Finally, we show that extreme positive earnings surprises are a successful method for attracting attention, with significant increases in the number of institutional owners, the number of analysts, and trading volume during the subsequent three years.

We develop and validate a measure of tax accrual quality. Tax accrual quality captures variation in the extent to which the income tax accrual maps into income tax-related cash flows, with lower variation indicating a higher quality tax accrual. Low tax accrual quality arises from (1) management estimation error and (2) financial reporting standards that lead to differences between income tax expense and income tax cash flows not captured by deferred tax assets and liabilities. We validate our tax accrual quality measure by showing it is associated with firm characteristics that capture both constructs and by demonstrating it predicts future tax-related restatements and internal control material weaknesses. We illustrate the importance of our measure by showing that investors view tax expense as more informative in firms with better tax accrual quality. Future researchers can use tax accrual quality to address questions related to estimation error in the income tax account.

This paper examines the effect of tax-related material weakness in internal controls (MWIC) over financial reporting investors’ valuation of unrecognized tax benefits (UTBs). Firms are required to record a UTB when their uncertain tax positions are unlikely to be sustained upon tax return audit. While Koester (2012) finds that investors positively value UTBs, we posit that a tax-related MWIC represents information risk in the tax account, reducing the value-relevance of UTBs. We predict that the positive relation between market value of equity and UTBs is attenuated when firms report a tax-related MWIC, and our empirical tests reveal that the relation is completely mitigated in the presence of a tax-related MWIC. Falsification tests confirm that non-taxrelated MWICs do not attenuate the positive relation between market value of equity and UTBs, consistent with tax-related MWICs capturing low information quality specific to the tax account.