Category Archives: Regulations

Updates from Chicago Booth

Want to pay less tax? Improve your firm’s internal reporting
By Marty Daks – When companies engage in the great American pastime known as tax avoidance, many parse the Internal Revenue Code for loopholes to reduce their effective tax rate. But research suggests they should also scrutinize the quality of their internal reporting.

Internal information quality (IIQ), a term coined by Chicago Booth’s John Gallemore and University of North Carolina’s Eva Labro, encompasses computer reporting systems and any other resources that a company devotes to ensuring the quality and ease of access of information within a firm. The elements that constitute IIQ have been largely overlooked in tax-avoidance literature—perhaps because they are usually not observable, and are difficult for academics to measure.

Gallemore and Labro argue companies should pay more attention to these issues, which they define in terms of the accessibility, usefulness, reliability, accuracy, quantity, and signal-to-noise ratio of the data and knowledge within an organization. Their findings suggest that firms with high IIQ tend to enjoy lower effective tax rates and, all else being equal, a smaller tax bite.

Gallemore and Labro employed four publicly available variables, using data from 1994 to 2010, to rate firms’ IIQ: the speed at which management released an earnings announcement after its fiscal year closed, the accuracy of management’s earnings forecasts, the absence of material weaknesses in internal controls, and the lack of restatements due to errors.

The researchers used these measures to identify companies that released earnings more rapidly and forecasted them more accurately, and had fewer Section 404 citations and restatements due to errors. They assigned these firms higher IIQ ratings.

High-IIQ firms, they find, tend to exhibit some positive traits, including centralized and standardized business transaction processing, more-efficient reporting practices, and the ability to share data across business units and geographical locations. more>

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Anatomy of an oversight investigation: White House security clearances

By Isabella Gelfand and Jackson Gode – Since regaining the majority in January, House Democrats have been conducting oversight of the Trump administration on issues ranging from family separation at the border to the rollback of environmental regulations. While the policy areas addressed by these investigations are diverse, House committees often apply the same tools to perform oversight. As Congress attempts to exert influence on the White House in hopes of obtaining information, Trump administration officials continue to utilize several tactics of their own to stall the process.

As part of its mandate to conduct oversight of “the operation of Government activities at all levels,” the House Oversight and Reform Committee is frequently engaged in conflicts with the executive branch over information access. One such clash during the 116th Congress has involved the White House security clearance process, which came under fire when media reports indicated that the administration allowed individuals to operate under interim security clearances for extended periods and ignored concerns raised by intelligence officials. Here, we outline the ongoing security clearance investigation and use it to highlight a set of common steps in the oversight process.

When conducting oversight, members of Congress have several tools at their disposal. Most notably, they can request documents, call witnesses to testify, issue subpoenas, and hold individuals in contempt of Congress for noncompliance. Oversight investigations are often initiated by an official request for information, usually in the form of a letter written by a committee chair to an executive branch official. The chair uses this correspondence to ask for documents and/or to invite a witness to give testimony before the committee. more>

Updates from Chicago Booth

Why banning plastic bags doesn’t work as intended
Benefits of bag regulations are mitigated by changes in consumer behavior
By Rebecca Stropoli – As well-intentioned bans on plastic shopping bags roll out across the United States, there’s an unintended consequence that policy makers should take into account. It turns out that when shoppers stop receiving free bags from supermarkets and other retailers, they make up for it by buying more plastic trash bags, significantly reducing the environmental effectiveness of bag bans by substituting one form of plastic film for another, according to University of Sydney’s Rebecca L. C. Taylor.

Economists call this phenomenon “leakage”—when partial regulation of a product results in increased consumption of unregulated goods, Taylor writes. But her research focusing on the rollout of bag bans across 139 California cities and counties from 2007 to 2015 puts a figure on the leakage and develops an estimate for how much consumers already reuse those flimsy plastic shopping bags.

This is a live issue. After all those localities banned disposable bags, California outlawed them statewide, in 2016. In April 2019, New York became the second US state to impose a broad ban on single-use plastic bags. Since 2007, more than 240 local governments in the US have enacted similar policies.

She finds that the bag bans reduced the use of disposable shopping bags by 40 million pounds a year. But purchases of trash bags increased by almost 12 million pounds annually, offsetting about 29 percent of the benefit, her model demonstrates. Sales of small trash bags jumped 120 percent, of medium bags, 64 percent, and of tall kitchen garbage bags, 6 percent. Moreover, use of paper bags rose by more than 80 million pounds, or 652 million sacks, she finds. more>

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Updates from Chicago Booth

How to curb short-termism and boost the US economy
End the requirement for quarterly reporting
By Haresh Sapra – The United States is in the middle of that rarest of events: a public conversation on accounting standards. Since 1970, public companies in the US have been required to report quarterly. The Securities and Exchange Commission is now considering changing that frequency to biannual reporting, and in December 2018 issued a request for public comment on the matter.

Admittedly, the issue isn’t exactly igniting the passions of the masses, but the implications of these discussions could significantly affect the US economy. For the first time in many years, policy makers are seriously reconsidering the rules on corporate financial reporting. The SEC is examining how to change the system to lighten the burdens on corporations, and to reduce what it calls the “overly short-term focus by managers” of listed companies.

My research suggests there would be great benefits to the US ending mandatory quarterly reporting. It would help to kick-start innovation among US companies, for one. That should be of particular interest to the SEC, which stated in its request that it is interested in how the current system “may affect corporate decision making and strategic thinking.” more>

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Globalization’s Wrong Turn

And How It Hurt America
By Dani Rodrik – Globalization is in trouble. A populist backlash, personified by U.S. President Donald Trump, is in full swing. A simmering trade war between China and the United States could easily boil over. Countries across Europe are shutting their borders to immigrants. Even globalization’s biggest boosters now concede that it has produced lopsided benefits and that something will have to change.

Today’s woes have their roots in the 1990s, when policymakers set the world on its current, hyperglobalist path, requiring domestic economies to be put in the service of the world economy instead of the other way around. In trade, the transformation was signaled by the creation of the World Trade Organization, in 1995. The WTO not only made it harder for countries to shield themselves from international competition but also reached into policy areas that international trade rules had not previously touched: agriculture, services, intellectual property, industrial policy, and health and sanitary regulations. Even more ambitious regional trade deals, such as the North American Free Trade Agreement, took off around the same time.

In finance, the change was marked by a fundamental shift in governments’ attitudes away from managing capital flows and toward liberalization. Pushed by the United States and global organizations such as the International Monetary Fund and the Organization for Economic Cooperation and Development, countries freed up vast quantities of short-term finance to slosh across borders in search of higher returns. more>

How European telcos are monitoring our online activity

The security and privacy of personal data are being jeopardized as Deep Packet Inspection is deployed by internet service providers.
By Katherine Barnett – Europe has not escaped the global move towards ‘surveillance capitalism’. Numerous pieces of legislation are under consideration which put online freedoms and privacy at risk—the UK’s Online Harms white paper is just one example.

The European Digital Rights (EDRi) organization recently discovered that European telcos were monitoring internet connections and traffic through a technique known as Deep Packet Inspection (DPI).

European telcos have so far escaped penalization for their use of DPI, on the grounds that it counts as ‘traffic management’. Under current net-neutrality law, it is technically allowed for purposes of network optimization—but its use for commercial or surveillance purposes is banned.

In January, however, the EDRi produced a report, outlining how as many as 186 European ISPs had been violating this constraint, using DPI to affect the pricing of certain data packages and to slow down internet services running over-capacity. Alongside 45 other NGOs and academics, it is pushing for the use of DPI to be terminated, having sent an open letter to EU authorities warning of the dangers.

Deep Packet Inspection is a method of inspecting traffic sent across a user’s network. It allows an ISP to see the contents of unencrypted data packets and grants it the ability to reroute or block traffic.

Data packets sent over a network are conventionally filtered by examining the ‘header’ of each packet, meaning the content of data traveling over the network remains private. They work like letters, with simple packet filtering allowing ISPs to see only the ‘address’ on the envelope but not the contents.

DPI however gives ISPs the ability to ‘open the envelope’ and view the contents of data packets. It can also be used to block or completely reroute data.

Regulators have so far turned a blind eye to this blatant disregard for net-neutrality law and telcos are pushing for DPI to be fully legalized.

This sparks major concerns about user privacy and security, as DPI renders visible all unencrypted data sent across a user’s connection, allowing ISPs to see browsing activity. more>

A primer on how Chinese law might enforce a US-China trade deal

By Jamie P. Horsley – As recently as early May, optimism ran high that the United States and China were nearing an agreement to resolve their escalating trade dispute. But talks have hit an impasse, with both sides announcing new rounds of tariffs over the past few days.

In an interview on Fox News Sunday, White House economic adviser Larry Kudlow explained that a key point of contention is U.S. insistence that Chinese commitments be “codified by law in China, not just a State Council announcement.” According to Kudlow, the U.S. seeks “very strong enforcement provisions” to correct past Chinese behavior on trade, which he characterized as unfair, nonreciprocal, and sometimes unlawful.

Various U.S. media reported that the Chinese side was averse to the idea of a foreign country dictating Chinese law. Instead, negotiators from Beijing reportedly offered to codify the agreement through regulatory and administrative actions. The standoff raises an important question: If the other substantive issues can be resolved, would an agreement be enforceable even if it falls short of being codified in national laws?

National laws, local regulations, State Council regulations, and rules are all part of what is collectively called “legislation” (lifa). National laws (falü) are adopted by China’s National People’s Congress (NPC) and the NPC Standing Committee pursuant to formal procedures—including public notice and comment—set forth in the Legislation Law.

Similarly, local regulations (difangxing fagui) are adopted by the people’s congress operating in a particular province or autonomous region. State Council regulations (xingzheng fagui), which are legally binding and enforceable, are also governed by the Legislation Law and subject to public comment and other procedures stipulated in State Council implementing regulations (colloquially, the “Rulemaking Regulations”).

The same applies to rules (guizhang), which are promulgated by central departments and local governments. more>

Why no-platforming is sometimes a justifiable position

By Neil Levy – The discussion over no-platforming is often presented as a debate between proponents of free speech, who think that the only appropriate response to bad speech is more speech, and those who think that speech can be harmful. I think this way of framing the debate is only half-right. Advocates of open speech emphasize evidence, but they overlook the ways in which the provision of a platform itself provides evidence.

No-platforming is when a person is prevented from contributing to a public debate, either through policy or protest, on the grounds that their beliefs are dangerous or unacceptable.

Open-speech advocates highlight what we might call first-order evidence: evidence for and against the arguments that the speakers make. But they overlook higher-order evidence.

Higher-order evidence is evidence about how beliefs were formed. We often moderate our confidence in our beliefs in the light of higher-order evidence. For instance, you might find the arguments in favor Continue reading

Updates from Chicago Booth

Trade policy is upending markets—but not investment
By Steven J. Davis – Trade-policy concerns became a major source of US stock market volatility in 2018. For example, the S&P 500 fell 2.5 percent on March 22, 2018, reacting to news about just-announced US tariffs on tens of billions of dollars of Chinese imports. Four days later, the index rose 2.7 percent on news the United States and China had begun trade negotiations. Still, tariffs and tariff threats between the two countries ratcheted upward over the next several months.

This prominence marks a striking change, as demonstrated in my research with Northwestern’s Scott R. Baker, Northwestern PhD candidate Marco Sammon, and Stanford’s Nicholas Bloom. We took a systematic look at the role of trade-policy developments and other news in large daily stock market moves. We first identified every daily move of 2.5 percent or more, up or down, in the US stock market. By this criterion, there were 1,112 large daily moves from 1900 to the end of 2018.

For each large move, we read next-day news articles in the Wall Street Journal to classify perceptions of what moved the market. The WSJ attributed seven of 1,103 large moves from 1900 to 2017 mainly to news about trade policy. But in a remarkable turnabout, the newspaper attributed three of nine large moves in 2018 to trade-policy news. From a historical perspective, the prominent role of trade policy in recent US stock market swings is highly unusual.

The highly visible US–China dispute is only one of the heightened trade-policy concerns behind the pattern we chart. The US has also become enmeshed in trade-policy disputes with several other major trading partners since Donald Trump became president.

How much do these heightened concerns affect capital-investment expenditures by US businesses? Not as much as you might think. more>

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How to govern a digitally networked world

Because the internet is a network of networks, its governing structures should be too. The world needs a digital co-governance order that engages public, civic and private leaders.
By Anne-Marie Slaughter and Fadi Chehadé – Governments built the current systems and institutions of international cooperation to address 19th- and 20th-century problems. But in today’s complex and fast-paced digital world, these structures cannot operate at ‘internet speed’.

Recognizing this, the United Nations secretary-general, António Guterres, last year assembled a high-level panel—co-chaired by Melinda Gates and the Alibaba co-founder Jack Ma—to propose ways to strengthen digital governance and cooperation. (Fadi Chehadé, co-author of this article, is also a member.) It is hoped that the panel’s final report, expected in June, will represent a significant step forward in managing the potential and risks of digital technologies.

Digital governance can mean many things, including the governance of everything in the physical world by digital means. We take it to mean the governance of the technology sector itself, and the specific issues raised by the collision of the digital and physical worlds (although digital technology and its close cousin, artificial intelligence, will soon permeate every sector).

Because the internet is a network of networks, its governing structures should be, too. Whereas we once imagined that a single institution could govern global security or the international monetary system, that is not practical in the digital world. No group of governments, and certainly no single government acting alone, can perform this task.

Instead, we need a digital co-governance order that engages public, civic and private leaders on the basis of three principles of participation.

First, governments must govern alongside the private and civic sectors in a more collaborative, dynamic and agile way.

Secondly, customers and users of digital technologies and platforms must learn how to embrace their responsibilities and assert their rights.

Thirdly, businesses must fulfill their responsibilities to all of their stakeholders, not just shareholders. more>