Essays on Disclosure Activity and Corporate Behavior

Abstract

This dissertation is comprised of two essays on corporate disclosure activity and corporate behavior. The first essay, entitled Perceived Tax Audit Risk and Corporate Tax Behavior: Using Footnotes in 10-K Filings, examines the association between firms tax audit risk and its tax behavior. Utilizing a machine learning methodology, I measure the tax audit risk perceived by each firm as the extent of tax audit discussion in firms 10-K filings. I find that firms comply more with tax laws when they are subject to stronger tax enforcement. I validate the tax audit discussion in 10-K filings capturing tax audit risk rather than a rhetoric of managers by showing the correlation with the IRS audit probability. The results are robust when including both tax audit topic and the IRS audit probability, implying that firms tax audit discussion delivers incremental information to the IRS audit rate. Also, I find that there exists heterogeneity in the effect of tax audit risk across firms. The result is attenuated when there are stronger external monitoring mechanisms and when the firm operates in foreign jurisdictions. The second essay, entitled The Effect of Financial Reporting Readability on Foreign Investors Information Acquisition Activity, examines the effect of financial reporting readability on foreign investors information acquisition activity. I contend that more readable financial reports facilitate foreign investors information collection activities, and this in turn increases foreign investors investment in U.S. stocks. As anticipated, I find that foreign investors more frequently access 10-K filings that are more readable. Their frequent access leads to higher foreign institutional ownership of U.S stocks in the subsequent period. I also find that the positive association between foreign access and financial reporting readability is stronger when readers are from countries of which language shares more similarities with English. Overall, findings suggest that financial reporting readability plays an important role in facilitating foreign investment, further highlighting the benefit of making financial reports more readable.