Essays on Political Factors and Information Flows in Financial Reporting

This dissertation is comprised of two essays relating to political factors that affect the financial reporting environment and a third essay that examines information flows between capital market participants. The first essay examines the economic consequences of using financial reporting for foreign policy objectives. I use the disclosure requirements of the Iran Threat Reduction and Syria Human Rights Act of 2012 as my empirical setting. I find these disclosures impose capital market penalties on firms who do business with Iran and that firms attempt to mitigate the associated political costs through various mechanisms. The evidence suggests that adapting securities regulation to serve political objectives, while effective at achieving those objectives, also entails unintended consequences. The second essay examines the relation between political corruption and corporate tax aggressiveness among firms headquartered in the U.S. Using data on convictions of public officials from the U.S. Department of Justice as a proxy for political corruption, we find that firms headquartered in more politically corrupt federal districts engage in more aggressive tax avoidance. This finding is consistent with political corruption impacting the culture surrounding firms’ headquarter locations, with managers and other stakeholders viewing aggressive tax avoidance (i.e., rule bending) as more acceptable in more politically corrupt areas. Our study extends the literature exploring the effects of social norms on corporate tax avoidance and the consequences of local political corruption. In the final essay we document managers strategically disclose the ratio of orders received to orders fulfilled (book-to-bill), when it conveys positive news. First, we find managers disclose book-to-bill more frequently when unexpected future earnings are higher. Second, because the ratio is can be interpreted as the growth in the order book, we show that the disclosed ratios themselves tend to reveal good news. Examining the interaction of strategic disclosure and qualitative characterizations (i.e. using a positive or negative adjective to modify “book-to-bill”), we find managers strategically disclose to decrease the specificity of negative news rather than mislead the market. Finally, we estimate similar regressions with managerial forecasts and find different results, highlighting the possibility that managers disclose both good and bad news symmetrically, but use different metrics to do so