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. This paper was accepted by Mary Barth, accounting.

This paper examines the association between ineffective internal control over financial reporting and the profitability of insider trading. We predict and find that the profitability of insider trading is significantly greater in firms disclosing material weaknesses in internal control relative to firms with effective control. The positive association is present in the years leading up to the disclosure of material weaknesses, but disappears after remediation of the internal control problems. We find insider trading profitability is even greater when insiders are more likely to act in their own self-interest as indicated by auditors' weak "tone at the top" adverse internal control opinions and this incremental profitability is driven by insider selling. Our research identifies a We appreciate the helpful comments from the editor Michelle Hanlon, an anonymous reviewer, Steve Lin, Stefan Veith, participants at the 2010 AAA Annual Meeting and 2011 EAA Congress, and workshop participants at Erasmus University Rotterdam. new setting where shareholders are most at risk for wealth transfers via insider trading and highlights market consequences of weak "tone at the top".

This study investigates the role of financial reporting quality in merger and acquisition (M&A) deals that are ultimately terminated (i.e., go bust). If a target is a U.S. publicly traded company, an acquirer’s initial assessment of the potential benefits associated with the acquisition of the company is based on publicly available information. Generally, the acquirer obtains limited private information from the target prior to announcing the deal, but engages in transactional due diligence after signing the acquisition agreement to affirm that the financial reporting warranties made by the target are accurate. We construct a low‐quality financial reporting score based on measures prior research identifies as being associated with less reliable, less relevant, and less precise financial reporting. We find that acquirers offer higher premiums for targets with low‐quality financial reporting. However, we also find that low‐quality financial reporting increases the likelihood of deal renegotiation, and contributes to the probability of deals going bust. We document that failed targets are more likely to restate their financial statements after the announcement of the deal, supporting our conjecture that low‐quality financial reporting contributes to deals being terminated. Our research develops a new measure of low‐quality financial reporting, documents that the measure is related to M&A deal outcomes and financial restatements, and provides insights into the consequences of M&A transactional due diligence.

Before completing merger and acquisition (M&A) transactions, acquiring firms conduct due diligence. This process provides acquiring firms with a more informed assessment of the expected costs, benefits, and risks of an acquisition and offers one last opportunity to renegotiate or terminate an M&A transaction. However, acquiring firms must trade off the costs and benefits of performing additional due diligence versus completing the acquisition. Based on an analysis of the time to negotiate the acquisition agreement and complete the transaction, I predict and find that competitive pressures, short‐term financial reporting incentives, and agency problems are associated with less due diligence. I also find that less due diligence is associated with lower post‐acquisition profitability, a higher probability of acquisition‐related goodwill impairments, and lower quality fair value estimates for the acquired assets and liabilities. These findings highlight due diligence as an important factor explaining cross‐sectional variation in post‐acquisition performance and financial reporting for business combinations.

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