This study shows that firms collectively incur a cost for managing earnings and analyst expectations to meet earnings forecasts. We compare the coefficient in the regression of abnormal stock returns on earnings surprise (the earnings response coefficient [ERC]) across ranges of earnings surprises. The ERC for earnings surprises in the range [0, 1¢] is significantly lower than ERCs for earnings surprises in adjacent ranges for firm‐quarters in the early and mid 2000s, but not for those in the 1990s. The results are robust to controlling for the sign of estimated discretionary accruals and the trajectory of analyst earnings forecasts. We further find that investors are right to be skeptical about earnings surprises in the range [0, 1¢]. The relation of future earnings surprise with current earnings surprise is more negative for current earnings surprises in that range than for those in any other range. Evidence also suggests analysts react negatively to earnings surprises in that range.

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The study examines how the risk of exhausting corporate tax liabilities before deducting interest expense affects corporate leverage. It differs from prior studies in three ways: (1) it uses data compiled by the Intemal Revenue Service (IRS) from corporate tax retums rather than accounting data; (2) it measures risk of tax exhaustion more accnrately; and (3) it adopts a first-difference time-series approach, so that firms act as their own control between adjacent years. These methodologicail innovations reduce biases caused by measurement error and omitted variables that were present in prior research. The results suggest that, all else being equal, high risk of tax exhaustion reduces firms' use of leverage. As well, the study provides the first evidence that personal taxes significantly affect corporate leverage. The effects on leverage decisions of other variables are also tested and the results are consistent with predictions from prior theoretical work.

Prior empirical research on transfer pricing only reported what firms d o but seldom explained why. This study moves the research forward by introducing hypothesis testing.Atkinson ( 1987) shows that pricing transfers at variable cost when capacity is in excess. as prescribed by economic theory. would induce the buying unit to overstate expected demand at the capacity planning stage and cause a waste of resources. To test whether the strategic issue affects transfer pricing decisions, the study compares pricing methods for longterm transfer situations. which were provided for at the capacity planning stage, and ad hoc transfers. which were not. The result: long-term transfer relationships are indeed less likely to be priced at variable cost than are -ad hoc transfers.As well. while the two-step method of charging full cost -charging variable cost for each unit transferred and separately charging a flat fee each period for capacity on reserve -has many good control qualities, it remained just an academic curiosity: there was no evidence of its wide use among firms. This study finds that the two-step method is as widely in use as the one-step method -charging variable cost plus unit fixed costs for each unit transferred.