This study investigates the relation between corporate political connections and tax aggressiveness. We study a broad array of corporate political activities, including the employment of connected directors, campaign contributions, and lobbying. Using a large hand-collected data set of U.S. firms' political connections, we find that politically connected firms are more tax aggressive than nonconnected firms, after controlling for other determinants of tax aggressiveness, industry and year fixed effects, and the endogenous choice of being politically connected. Our findings are robust to various measures of political connections and tax aggressiveness. These results are consistent with the conjecture that politically connected firms are more tax aggressive because of their lower expected cost of tax enforcement, better information regarding tax law and enforcement changes, lower capital market pressure for transparency, and greater risk-taking tendencies induced by political connections.

Several empirical studies show that investment strategies that favor the purchase of stocks with low prices relative to conventional measures of value yield higher returns. Some of these studies imply that investors are too optimistic about~glamour! stocks that have had good performance in the recent past and too pessimistic about~value! stocks that have performed poorly. We examine whether investors systematically overestimate~underestimate! the future earnings performance of glamour~value! stocks over the 1976 to 1997 period. Our results fail to support the extrapolation hypothesis that posits that the superior performance of value stocks is because investors make systematic errors in predicting future growth in earnings of out-of-favor stocks.

Divergence of opinions among investors, manifested in the dispersion of analysts' earnings forecasts, may play an important role in asset pricing. This article reports tests of whether disagreement can explain the cross-sectional return difference between value and growth (or "glamour") nvestment strategies that call for the purchase (sale) of stocks with low (high) prices relative to dividends, earnings, book value, or other measures of value have been popular in the U.S. market since Graham and Dodd (1934). Nevertheless, the fact that value stocks (those with high book-to-market ratios) earn higher returns than growth (or "glamour") stocks (those with low book-to-market ratios) remains a puzzle in asset pricing. The exact interpretation of this "value premium" is one of the issues in the ongoing debate between those who advocate rational asset pricing and proponents of behavioral finance.Supporters of the rational explanation (e.g., Fama and French 1993) argue that the value premium is compensation for bearing risk; value stocks are fundamentally riskier. Lakonishok, Shleifer, and Vishny (1994) claimed, however, that value stocks produce superior returns because investors consistently overestimate the future earnings of growth stocks relative to value stocks.1 The essence of this argument is that investors, tying their expectations of future growth in earnings to past bad (or good) earnings, are excessively pessimistic (optimistic) about value (growth) stocks. That is, investors make systematic errors in predicting future growth in earnings of value stocks and their pessimism about the future for value stocks is the cause of the superior performance of value stocks relative to growth stocks. Subsequent studies that provided evidence in favor of this behavioral explanation of the value premium include La Porta (1996) and La Porta, Lakonishok, Shleifer, and Vishny (1997). (The nonrisk-based explanation is also known as the "extrapolation" or "errors-in-expectations" explanation.) Recently, Doukas, Kim, and Pantzalis (2002), using U.S. analyst earnings forecasts as a proxy for the market's expectations of future earnings, provided evidence against the errors-in-expectations view. Therefore, the abnormal return of value stocks on earnings announcement days found by La Porta et al. must be caused by some mechanism other than the surprise in the level of earnings. 2 We suggest that disagreement among investors is such a mechanism and focus our article on this possibility.Proponents of the rational explanation of the value premium argue that value stocks are fundamentally riskier than growth stocks, which implies that the higher average returns of stocks with high book-to-market ratios reflect compensation for risk. These proponents reject differences of opinion as a possible source of risk.

We do not want to maximize the price at which Berkshire shares trade. We wish instead for them to trade in a narrow range centered at intrinsic value. . . [We] are bothered as much by significant overvaluation as significant undervaluation. Warren Buffet, Berkshire Hathaway Annual Report, 1998. One of the distinct characteristics of the US capital market is its transparency. Unlike capital markets in other countries, companies traded on the US stock markets are supposed to accurately report a wide range of information to investors, who then use that information to assess the risks and rewards of their investments. Security analysts generally receive credit for contributing to the stock market's transparency. In response to the growing demand by investors and corporate managers for the dissemination of firm-specific information and stock valuation, security analysis has increased considerably in recent years. In the 1990s, stock recommendations and earnings forecasts issued by analysts associated with major brokerage houses gained dramatic prominence among investors and corporate managers, and came to represent a primary source of information for investors.In this paper, we study whether security analysts play an important role in corporate finance. We ask whether heightened analyst coverage is associated with excessive external financing and overinvestment. The pressures and economic incentives to generate trading commissions and investment-banking business can influence corporate financing, and as a result, investment, when analysts focus on serving these interests at the expense of the integrity of their research. An empirical investigation of the role of analysts from this perspective is important for the understanding of financial markets' capital allocation process.