Research

Non-profits’ Financial Reports Benefit from Oversight

Assistant Professor Michelle Yetman presented two papers at the annual American Accounting Association meeting in Chicago last August. The first, “Effects of Governance on the Financial Reporting Quality of Nonprofit Organizations,” was co-authored with Professor Robert Yetman.

In her talk, Yetman described how stakeholders use nonprofit financial information for their investing, contracting, and regulating decisions. Stakeholder decisions are directly affected by the quality of the underlying financial information provided by the nonprofit. She concluded that oversight and monitoring provided by auditors and municipal bond lenders and associated intermediaries have positive effects on nonprofit reporting quality. She contended that attempts to enhance the monitoring and oversight of nonprofits can lead to higher quality financial reports, particularly if those efforts involve auditors or market participants such as lenders.

Price Effect of Capital Gains Tax on U.S. Cross-listed Stocks

Yetman also presented “Capital Gains Taxes, Pricing Spreads and Arbitrage: Evidence from Cross-Listed Firms in the U.S.,” a study she co-authored with Assistant Professors Jennifer Blouin and Luzi Hail of the Wharton School at the University of Pennsylvania. Their research examines how shareholder-level taxes affect the pricing of stocks that are simultaneously listed and traded on multiple exchanges around the globe.

Specifically, their study showed how an unexpected reduction in U.S. capital gains taxes as a result of the 1997 federal budget accord changed the pricing of foreign firms’ U.S. cross-listed shares compared to the underlying equities listed in their home country. The reduction in the capital gains tax rate increases expected after-tax cash flows of the U.S. cross-listed stock held by U.S. individual investors, and thus should have a price effect. Home country shares generally do not react, creating a pricing spread. When costs of arbitrage are low the pricing disparity quickly dissipates.

Yetman explained that they did not find consistent evidence of the lock-in effect, which predicates a decrease in prices attributable to a surge in volume for U.S. cross-listed shares with greater accrued taxable capital gains. Their findings suggest that an exogenous U.S. shock targeted at U.S. tax clientele can reverberate in international asset prices and affect foreign firms’ cost of equity capital.

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