Working Papers

Dissertation: Do Market Participants "Discount" Sales Generated via Promotional Coupons? Evidence from Transaction-Level Data

Companies commonly offer temporary price discounts to stimulate product demand. Despite the considerable impact that such promotional strategies have on future performance, firms rarely disclose information regarding the extent to which they provide discounts. In this study, I evaluate whether market participants observe and/or understand the implications of current period couponing (a special case of price discounts) for future performance. For a sample of public manufacturers of consumer-facing brands, I construct a firm-level measure of couponing activity using transaction-level data from Nielsen. I find that revenues and earnings are less persistent when backed by greater couponing activity. Further, greater couponing in the current quarter increases analyst optimism for future periods, leading to a higher likelihood of negative earnings surprises (and negative abnormal returns surrounding firms' earnings announcements). Collectively, my findings indicate a novel approach to using alternative data to support the investment process.

We examine a sample of analysts who, despite having a bearish stock recommendation for a covered firm, issue an unusually optimistic earnings forecast at the end of the year. For the period 2004 through 2018, among analysts with an unfavorable stock recommendation, we find that about 5% issue a final earnings forecast prior to the earnings announcement that exceeds even the most optimistic earnings forecast issued by any other analyst covering the stock, presumably in an effort to increase the likelihood that the firm misses earnings expectations. More than 11% of all firm-year observations are subject to at least one such forecast at the hands of a bearish analyst. We find that analysts with pessimistic stock recommendations are more likely to issue these “difficult-to-beat” earnings forecasts when they have greater pressure to justify their negative view of the stock and when the earnings forecast has greater potential to revise investor beliefs. Nevertheless, stock returns associated with these optimistic forecast revisions are muted. We also find that although Thomson Reuters often excludes these forecasts from the consensus earnings estimate, the majority remain in the consensus and increase the likelihood that the firm misses the consensus forecast by about 21%. However, the market reaction to a negative earnings surprise is less severe when a bearish analyst has issued a difficult-to-beat forecast for the firm. Our study sheds light on one perverse strategy analysts use to increase the likelihood of an earnings miss.

Prior research highlights the positive effects of PCAOB oversight on reporting and audit quality. However, to gain a clear understanding of the net benefits of regulation, it is important to also investigate corresponding costs. We investigate the relation between PCAOB inspection oversight and real earnings management (REM), a potentially value-destroying activity. We exploit the staggered timing of foreign governments’ allowance of PCAOB inspections in a generalized difference-in-differences design and find that companies engage in greater REM during periods of PCAOB inspection oversight. We find that this relation is stronger for companies that faced a reduced ability to manage earnings via accruals and that firms become more likely to meet earnings benchmarks through the use of REM subsequent to PCAOB oversight. Lastly, we find a negative association between PCAOB oversight and firm innovation. Collectively, our findings highlight a trade-off between improved audit quality and real costs of auditor regulatory oversight.

Although prior research argues that consumer backlash is a potential factor constraining aggressive tax planning, there is only limited empirical evidence supporting this view. To test for consumer backlash, we use the setting of LuxLeaks, a highly publicized news story in 2014, which revealed that PepsiCo used secret deals in Luxembourg to minimize taxes. We examine whether this unexpected revelation of negative tax news led to a decrease in purchases of Pepsi branded products by individual consumers across the United States. Using a difference-in-differences design calibrated around this event, we examine millions of soda purchases made by individual U.S. households. We do not find any evidence that purchases of Pepsi branded products, relative to purchases of other soda (e.g., Coca-Cola, Dr. Pepper, etc.) declined following LuxLeaks. We also perform numerous cross-sectional tests based on household or geographic characteristics (e.g., income, education, organic product purchases, and political orientation), but do not find evidence of a decline in purchases of Pepsi branded products after this event. Overall, our results suggest that the decision by managers to constrain their aggressive tax planning because of concerns about customer backlash may be unwarranted.

Florida sales taxes are unique in that they apply to leases on commercial real estate and the sales/leases of automobiles. Prior research and anecdotal evidence suggest that such taxes can burden lessees with unexpected costs and depress after-tax selling/renting/leasing returns for property owners. We examine whether these tax-induced financial pressures spill over and spur arson. We analyze a 20-year panel of Florida counties using a generalized difference-in-differences design and find that local sales tax rates positively predict arson levels for property subject to Florida sales taxes (commercial buildings and cars), but bear no relation to arson levels in property classes exempt from local sales taxes (single-family homes, government buildings). These findings suggest that sales taxes burden owners and lessees of affected property to the point that, at the margin, they resort to arson at higher rates (to avoid future payments, garner an insurance payout, prevent selling at a loss, etc.).