The impact of corporate tax avoidance on analyst coverage and forecasts

He, Guanming; Ren, Helen Mengbing; Taffler, Richard

doi:10.1007/s11156-019-00795-7

Cited by 41 publications

(21 citation statements)

References 119 publications

(158 reference statements)

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“…logtrade, lognetbuy and lognetsale are all constructed based on daily trading data; we aggregate daily inside trades to obtain overall trading volume over the first two fiscal quarters. Following prior research on the determinants of analyst coverage (Hayes, 1998;Mohanram and Sunder, 2006;He et al, 2019aHe et al, , 2019b, we include the following control variables in our regression models: research and development expenditures (rd), book-tomarket ratio (btm), size (size), firm beta (beta), stock return variance (retvol), stock price (price), stock returns (qtrret), trading volume (tradingvol), institutional stock ownership (insti), return on assets (roa), litigation risk (litigation) and an indicator variable for the post-Reg-FD period (fd). All control variables are defined in Table A1.…”

Section: Methodsmentioning

confidence: 99%

The impact of insider trading on analyst coverage and forecasts

Marginson

2020

ARJ

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Purpose The purpose of this study is to examine the effect of insider trading on analyst coverage and the properties of analyst earnings forecasts. Given the central role of analysts for information diffusion in stock markets, advancing understanding of the role insider trades may play in analyst coverage and forecasts, especially in the context of a changing legal environment (e.g. the implementation of Regulation Fair Disclosure [Reg FD]), should be a worthy goal. Design/methodology/approach To address the research questions, the authors run regressions in which the authors identify and control for as many possible determinants of analyst coverage and forecasts (e.g. firm size, information asymmetry and earnings performance) that are correlated with insider trades. To alleviate endogeneity concerns, the authors use three approaches. First, the authors extend the sample period to the post-Reg-FD period in which managers are not allowed to provide private information to financial analysts. Second, the authors measure analyst coverage in a window that is lagged by insider trades. Third, the authors employ firm-fixed-effects regressions in all the multivariate tests. Finally, following Larcker and Rusticus (2010), the authors conduct the impact threshold for a confounding variable test to assure that all regression analyses are indeed immune to the potential correlated-omitted-variable bias. Findings The authors find that the level of analyst coverage is positively related to the intensity of insider trades and that analyst coverage is more strongly associated with insider purchases than with insider sales. The authors also find that the positive association between analyst coverage and insider trades is less pronounced after the passage of Reg FD. Further investigations reveal that analysts revise their earnings forecasts upward following insider purchases, the informativeness of analyst forecast revisions significantly increases following insider purchases and optimistic bias in analyst forecast revisions is reduced as a result of insider purchases; the authors do not find similar evidence for insider sales. Research limitations/implications A large body of insider trading literature (Johnson et al., 2009; Badertscher et al., 2011; Thevenot 2012; Skaife et al., 2013; Billings and Cedergren 2015; Dechow et al., 2016) provides evidence that insiders actively trade on their private information, such as their foreknowledge of price-relevant corporate events. This literature suggests that insider trades are potentially value-relevant and are informative about a firm’s future prospects. However, less research attention has been paid to investigating how insider trades might affect market participants’ (especially sophisticated participants’) behavior. This study contributes to understanding the role that insider trading may play in shaping analyst behavior. Practical implications Prior research (Frankel and Li, 2004; Lustgarten and Mande, 1995; Carpenter and Remmers, 2001; Seyhun, 1990) maintains that insider sales are less informative about a firm’s future prospects than are insider purchases because insider sales might take place for the liquidity and diversification purposes. By probing the stock price responses to insider selling activities, Lakonishok and Lee (2001), Jeng et al. (2003) and Fidrmuc et al. (2006) infer that insider selling is not informative about future firm performance. However, for such an inference, the authors cannot rule out the possibility that insider sales do convey value-relevant information, but the stock market does not react correctly to such trading information (Beneish and Vargus, 2002). Because the authors focus on examining analysts’ responses to insider sales, and analysts are supposed to be sophisticated in information processing, this study adds more compelling evidence for the notion that insider sales convey less information about a firm’s future prospects than do insider purchases. Social implications There is an ongoing debate about the benefits and drawbacks of insider trading. Opponents of insider trading view insider trades as inequitable and immoral and assert that restricting insider trades curbs resource misallocation and benefits the whole society. Proponents contend that insider trading accelerates the price discovery process, increases market efficiency (Leland, 1992; Bernhardt et al., 1995; Choi et al., 2016) and may even play a role in rewarding and motivating executives (Roulstone, 2003; Denis and Xu, 2013). The authors add to this debate by documenting that insider trading increases the amount of information valuable to analyst research activities and helps enhance analyst services. Originality/value To the best of the authors’ knowledge, this study is the first to offer firm-level evidence of a positive association between insider trades and analyst coverage. By accounting for the post-Reg-FD regime, this paper is also the first to provide evidence on how analysts, in the absence of access to management’s private information because of the regime change by Reg FD, react to insider trades.

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Section: Methodsmentioning

confidence: 99%

The impact of insider trading on analyst coverage and forecasts

Marginson

2020

ARJ

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“…As for the prevention and control of stock price crash risk, studies have been conducted based on macroscopic measures [32,33]. At the microlevel, most studies centered on improving the insufficient transparency of information disclosure from different kinds of perspectives, such as financial constraint, analyst coverage, insider trading, and corporate tax avoidance [1,6,14,[34][35][36]. However, studies on the control of stock price crash risk starting from information diffusion remain to be expanded.…”

Section: Related Literaturementioning

confidence: 99%

Information Contagion and Stock Price Crash Risk

Zhang

Wang

Yao

2021

Mathematical Problems in Engineering

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We introduce continuity and temporariness into the independent cascade model to depict information diffusion in a social network. Investor behavior changes are determined according to the process of information diffusion, and the investment portfolio model consisting of sentiments is proposed to reveal the fire sales of stocks and the resulting stock price crash risk. Therefore, the relationship between information diffusion and stock price crash risk is established, and the contagion of stock price crash risk is analyzed from the perspective of information diffusion. Furthermore, some immunization strategies of networks are compared to prevent stock price crash risk. The results show that the tendency of stock price crash risk is consistent with that of information diffusion, which indicates that information diffusion before the fire sales is the key to triggering stock price crash risk. Moreover, investors with many ties contribute more to information diffusion than others; hence, immunization strategies of networks based on global information are more effective in preventing stock price crash risk than that based on local information. This study provides a new perspective for the study of contagion risk in the stock market, and it hints at the possibility of regulatory intervention to prevent stock price crash risk.

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“…We, thus, calculated the ratios of cumulative contribution to taxes (CC T /TA), employees (CC E /TA), purchases from suppliers (CC S /TA) and interest charges (CC I /TA). Several tax avoidance proxies have been proposed (Desai and Dharmapala, 2006;Dyreng et al, 2008;He et al, 2020). We have followed the methodology of Dyreng et al (2008) and He et al (2020) to calculate the long-term ETR, computing the sum of corporate income tax paid SAMPJ 12,1 and dividing it by the sum of a firm's pre-tax income net of special items over the previous five years.…”

Section: Empirical Study 41 Sample and Datamentioning

confidence: 99%

“…Several tax avoidance proxies have been proposed (Desai and Dharmapala, 2006;Dyreng et al, 2008;He et al, 2020). We have followed the methodology of Dyreng et al (2008) and He et al (2020) to calculate the long-term ETR, computing the sum of corporate income tax paid SAMPJ 12,1 and dividing it by the sum of a firm's pre-tax income net of special items over the previous five years. In some countries, the legislation describes a pay ratio that compares the compensation of a company's CEO with the median compensation of its other employees [Securities and Exchange Commission (SEC), 2017].…”

Section: Empirical Study 41 Sample and Datamentioning

confidence: 99%

Firm and country characteristics related to cumulative contribution to society

Serrano‐Cinca

Cuéllar-Fernández

Fuertes‐Callén

2020

SAMPJ

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Purpose Many indicators attempt to measure the social performance of a company from different perspectives. Grounded in stakeholder theory, this paper aims to propose capitalising the economic value distributed annually to society over a period of time, hereafter called a firm’s cumulative contribution to society (CCS). This can be done by including everything that stakeholders value; for example, payments of taxes, remuneration of employees, payments to suppliers and creditors, donations, dividends, research and development expenses and efforts to improve the environment. Design/methodology/approach First, this paper makes a methodological proposal about how to calculate the CCS and discusses potentials and shortcomings. Then, a set of hypotheses are formulated about the firm characteristics and country attributes that make the most positive contribution to society such as business models, financial performance, a country’s human development, income equality and the extent of its shadow economy. The authors also argue that a company that originally contributes to society will continue to do so because of the structural inertia faced by organisations. The hypotheses were validated with an empirical study conducted with a sample of 9,276 new-born European companies. Findings The most significant contributors to society are large, profitable companies, which are leveraged but solvent, with high asset turnover and high-profit margins and which are productive and pay high wages. Unfortunately, this win-win situation describes a small percentage of the explained variance, which can explain why social and financial performance sometimes do not go hand-in-hand. The paper identifies features of other types of companies that contribute to society, suggesting criteria for socially responsible investors. Country development favours the cumulative contribution that firms make to society. Research limitations/implications Most accounting systems do not collect all the information necessary to calculate a refined version of the indicator such as percentage of purchases from local suppliers, percentage of salaries for executives and disabled employees and percentage of financing from socially responsible financial entities. The authors encourage modification of the accounting systems to include those aspects. Practical implications This paper identifies several types of companies that contribute the most to society from a modest set of financial indicators. Socially responsible investors can estimate their contribution to society, devising new investment criteria. Social implications The paper identifies several types of companies that contribute the most to society from a modest set of financial indicators. Socially responsible investors can estimate their contribution to society, devising new investment criteria. Originality/value The paper makes two contributions, one methodological and the other empirical. By applying a financial methodology, the authors propose to capitalise the contributions of a company over a period of time. The empirical study identifies both firm and country characteristics that explain CCS.

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The impact of corporate tax avoidance on analyst coverage and forecasts

Cited by 41 publications

References 119 publications

The impact of insider trading on analyst coverage and forecasts

The impact of insider trading on analyst coverage and forecasts

Information Contagion and Stock Price Crash Risk

Firm and country characteristics related to cumulative contribution to society

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