Shane Heitzman

Theory provides competing predictions on whether informed investors immediately trade on newly generated private information. We address this question using SEC-mandated disclosures to identify the dates when new private information about target or acquiring firm value is created. We find that informed investors immediately trade on new private information in both the stock and options markets. Next, we investigate which factors drive the speed of these investors’ trading reactions to newly generated private information. We show that cross-sectional variation in the speed of their trading reactions can be explained by the number of privately informed investors, institutional ownership, the expected profits from informed trading and associated risk of attracting the attention of enforcement agencies, and the existence of public information about the acquisition deal.

We ask whether the quality of internal information matters for investment decisions. We predict that investment is more sensitive to internal profit signals and less sensitive to external price signals when managers have higher‐quality internal information. Consistent with recent theoretical and empirical research, we proxy for internal information quality using observable information properties. We find that the sensitivity of investment to profitability is increasing, while the sensitivity of investment to market‐to‐book is decreasing in internal information quality. Our focus on internal information and decision making offers new and unique insights on the importance of information quality and complements the growing literature on the role of external reporting quality in reducing financing frictions.

We examine the relation between tax net operating loss (NOL) carryforwards and corporate savings. Prior research finds that firms accumulate cash for precautionary reasons. While savings provide firms with necessary liquidity reserves, firms may incur taxes on returns earned on accumulated cash; thus, it is generally more tax-efficient for firms to distribute excess cash to shareholders than to generate passive investment income subject to double taxation. However, NOL carryforwards shield passive income from corporate tax, thereby lowering the cost of holding cash in the corporation and increasing optimal cash levels. We test whether and to what extent NOL tax benefits are associated with cash holdings. To do so, we develop a new proxy for worldwide NOL benefits that more accurately captures their value and variation across jurisdictions. Consistent with our predictions, we find that NOLs are positively associated with cash holdings, and this effect is incremental to other tax-related motivations for holding liquid assets. We also find that investor valuation of cash is increasing in the firm’s NOLs, suggesting that investors place a higher value on a firm’s liquidity when the corporate tax cost is low. The paper extends the literature on NOLs by demonstrating their role in corporate savings policies. Further, we provide researchers with a methodology to more accurately measure a firm’s NOLs.

Finance theory has long viewed corporate income taxes as a potentially important determinant of corporate financing decisions and capital structures. But finance academics have been unable to provide convincing empirical evidence of a material effect of taxes on corporate leverage, in part because of difficulties in constructing an effective proxy for marginal corporate tax rates, and hence for the tax benefits of debt, for large samples of individual companies.
The authors address this by analyzing leverage decisions in an industry whose publicly traded entities are organized either as taxable corporations, or as real estate investment trusts (REITs) that effectively avoid entity level taxation. This enables them to measure the relative tax benefits of debt with greater precision while controlling for important nontax characteristics that affect debt usage. The tax hypothesis predicts that for real estate firms with similar asset portfolios, taxable firms should have more debt than their nontaxable counterparts. Both the nontaxable and the taxable real estate firms in our sample routinely have more than twice the leverage of industrial firms, which suggests that factors other than taxes are contributing to their use of debt. But among real estate firms, tax status appears to play a much weaker role. Taxable firms have significantly more leverage only after 2000, when restrictions on REITs were removed through new regulations that made their operations much more like those of taxable real estate firms. Our findings also depend on real estate characteristics—most notably, only residential real estate firms demonstrated differences that are consistent with the tax hypothesis.
Taken together, the authors’ findings suggest that although taxes do seem to matter, their role is clearly secondary relative to factors such as the nature of the firm’s assets. A generous interpretation of our evidence puts the effect of taxes between one‐third and one‐half of that implied by prior research.