Table 3 Correlation matrix (Pearson top;...

Table 3

Correlation matrix (Pearson top; Spearman bottom)

Variables	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16
Bankruptcy	1	−0.44^a	−0.21^a	−0.49^a	−0.44^a	0.62^a	−0.22^a	−0.10^a	0.53^a	0.01	0.01	−0.01	0.27	0.38^a	0.13^c	0.05^a
Earnings	−0.54^a	1	0.26^a	0.69^a	0.38^a	−0.27^a	0.26^a	0.16^a	−0.20^a	0.08^a	−0.01	0.01	−0.15^c	−0.24^a	−0.02	−0.03
RET	−0.29^a	0.45^a	1	0.29^a	0.19^a	−0.17^a	0.94^a	0.08^a	−0.16^a	0.23^a	−0.01	0.02	−0.08	−0.17^a	0.03	−0.10^a
ROA	−0.61^a	0.86^a	0.42^a	1	0.60^a	−0.20^a	0.30^a	0.19^a	−0.11^a	0.03	0.01	−0.00	−0.15^b	−0.22^a	−0.00	0.00
ETL	−0.63^a	0.67^a	0.36^a	0.79^a	1	−0.36^a	0.20^a	0.17^a	−0.25^a	0.09^a	0.04	0.07^b	0.09	−0.28^a	−0.01	0.03
LTA	0.62^a	−0.28^a	−0.23^a	−0.38^a	−0.51^a	1	−0.17^a	0.01	0.82^a	0.02	0.12^a	0.01	0.05	0.45^a	−0.01	0.13^a
LSIGMA	−0.29^a	0.45^a	0.90^a	0.42^a	0.36^a	−0.24^a	1	0.11^a	−0.16^a	0.21^a	−0.02	−0.04	0.16	−0.19^a	0.04	−0.09^a
Size	0.14^a	0.17^a	0.11 ^a	0.24^a	0.20 ^a	0.03	0.14^a	1	−0.02	0.25^a	0.18^a	−0.20^a	0.34^b	−0.81^a	0.02	−0.01
Leverage	0.53^a	−0.22^a	−0.20^a	−0.29^a	−0.38 ^a	0.83^a	−0.20^a	−0.02	1	−0.01	0.10^a	0.04	−0.31	0.58^a	−0.01	0.11^a
MTB	−0.02	0.12^a	0.27^a	0.19^a	0.13 ^a	−0.01	0.25^a	0.32^a	−0.04^c	1	−0.06^b	0.02	−0.26	−0.28^a	0.02	−0.15^a
LitiCost-Aud	0.01	0.03	0.00	0.03^b	0.05^b	0.12^a	−0.02	0.19^a	0.10^a	−0.05^c	1	0.19^a	0.19^b	−0.08^a	−0.02	−0.05^b
TaxCost	−0.03	0.03	0.01	0.03	0.04	0.02	−0.04	−0.22^a	0.04	−0.02	0.16^a	1	0.06	0.18^a	0.04	0.04
Reg	0.26	−0.06	−0.12	−0.35	0.32	0.12	0.16	0.62^a	−0.28^c	−0.27^b	0.54^b	−0.08	1	0.36	0.12	0.16
C-score	0.38^a	−0.26^a	−0.21^a	−0.36^a	−0.36^a	0.45^a	−0.24^a	−0.80^a	0.55^a	−0.33^a	−0.07^b	0.21^a	0.14	1	0.03	0.09^a
CR	0.17^a	−0.16^a	0.01	−0.17^a	−0.17^a	0.08	0.03	−0.04	0.04^c	0.07^a	−0.02	0.01	0.24	0.05^c	1	0.02
NOA	0.09^a	−0.09^a	−0.09	−0.12^a	−0.13^a	0.10^a	−0.08^a	−0.13^a	0.07^a	−0.14^a	−0.05^b	0.03	0.27	0.15^a	0.01	1

Variables	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16
Bankruptcy	1	−0.44^a	−0.21^a	−0.49^a	−0.44^a	0.62^a	−0.22^a	−0.10^a	0.53^a	0.01	0.01	−0.01	0.27	0.38^a	0.13^c	0.05^a
Earnings	−0.54^a	1	0.26^a	0.69^a	0.38^a	−0.27^a	0.26^a	0.16^a	−0.20^a	0.08^a	−0.01	0.01	−0.15^c	−0.24^a	−0.02	−0.03
RET	−0.29^a	0.45^a	1	0.29^a	0.19^a	−0.17^a	0.94^a	0.08^a	−0.16^a	0.23^a	−0.01	0.02	−0.08	−0.17^a	0.03	−0.10^a
ROA	−0.61^a	0.86^a	0.42^a	1	0.60^a	−0.20^a	0.30^a	0.19^a	−0.11^a	0.03	0.01	−0.00	−0.15^b	−0.22^a	−0.00	0.00
ETL	−0.63^a	0.67^a	0.36^a	0.79^a	1	−0.36^a	0.20^a	0.17^a	−0.25^a	0.09^a	0.04	0.07^b	0.09	−0.28^a	−0.01	0.03
LTA	0.62^a	−0.28^a	−0.23^a	−0.38^a	−0.51^a	1	−0.17^a	0.01	0.82^a	0.02	0.12^a	0.01	0.05	0.45^a	−0.01	0.13^a
LSIGMA	−0.29^a	0.45^a	0.90^a	0.42^a	0.36^a	−0.24^a	1	0.11^a	−0.16^a	0.21^a	−0.02	−0.04	0.16	−0.19^a	0.04	−0.09^a
Size	0.14^a	0.17^a	0.11 ^a	0.24^a	0.20 ^a	0.03	0.14^a	1	−0.02	0.25^a	0.18^a	−0.20^a	0.34^b	−0.81^a	0.02	−0.01
Leverage	0.53^a	−0.22^a	−0.20^a	−0.29^a	−0.38 ^a	0.83^a	−0.20^a	−0.02	1	−0.01	0.10^a	0.04	−0.31	0.58^a	−0.01	0.11^a
MTB	−0.02	0.12^a	0.27^a	0.19^a	0.13 ^a	−0.01	0.25^a	0.32^a	−0.04^c	1	−0.06^b	0.02	−0.26	−0.28^a	0.02	−0.15^a
LitiCost-Aud	0.01	0.03	0.00	0.03^b	0.05^b	0.12^a	−0.02	0.19^a	0.10^a	−0.05^c	1	0.19^a	0.19^b	−0.08^a	−0.02	−0.05^b
TaxCost	−0.03	0.03	0.01	0.03	0.04	0.02	−0.04	−0.22^a	0.04	−0.02	0.16^a	1	0.06	0.18^a	0.04	0.04
Reg	0.26	−0.06	−0.12	−0.35	0.32	0.12	0.16	0.62^a	−0.28^c	−0.27^b	0.54^b	−0.08	1	0.36	0.12	0.16
C-score	0.38^a	−0.26^a	−0.21^a	−0.36^a	−0.36^a	0.45^a	−0.24^a	−0.80^a	0.55^a	−0.33^a	−0.07^b	0.21^a	0.14	1	0.03	0.09^a
CR	0.17^a	−0.16^a	0.01	−0.17^a	−0.17^a	0.08	0.03	−0.04	0.04^c	0.07^a	−0.02	0.01	0.24	0.05^c	1	0.02
NOA	0.09^a	−0.09^a	−0.09	−0.12^a	−0.13^a	0.10^a	−0.08^a	−0.13^a	0.07^a	−0.14^a	−0.05^b	0.03	0.27	0.15^a	0.01	1

Note(s): The upper (lower) right triangle of the matrix shows Pearson (Spearman) correlations. The sample period encompasses the 1978 to 2014 time horizon. a, b, c indicate significance at the 0.01, 0.05 and 0.10 levels, two-tailed. Bankruptcy is a dummy variable that takes one if the Altman score is < 1.81 and the firm filed for Chapter 11. Earnings is net income before extraordinary items (Compustat #18), scaled by lagged market value of equity (Compustat #125 * Compustat #199). RET is the annual stock return from nine months before fiscal year-end of three months after fiscal year-end from CRSP; ROA is net income divided by total assets; ETL is EBITDA divided by total liabilities. EBITDA is earnings before interest, taxes, depreciation and amortization. LTA is total liabilities divided by total assets. LSIGMA is the standard deviation of the residual return from a regression of twelve-monthly returns of the firm on monthly returns of the market index. Size is the natural log of market value of equity. Leverage is defined as total debt (Compustat #9 + Compustat #34) scaled by total assets (Compustat #6). MTB is the market-to-book ratio ((Compustat #25 * Compustat #199)/Compustat #60). LitiCost-Aud is a binary variable that equals one if the code of a firm’s auditor (Compustat #149) is from one to eight, and zero otherwise. Following Qiang (2007), we measure TaxCost as the association between book income and tax income estimated from time-series regression TX_jt = β_0j + β_jt BKTX_jt + ε_jt for firm j over the sample period, where BKTX jt is tax expense for firm j in year t (Compustat #16) and TX_jt is tax expense minus deferred tax expense (Compustat #16 - Compustat #50). Reg is the firm’s regulation cost. It is a dummy variable that equals 1 if sales deflated by industry total sales/the number of firms in the industry is of top quartile, and 0 otherwise; sales is Compustat #12. All variables are deflated by lagged total assets (Compustat #6); C-score is the firm-year measure of conservatism as in Khan and Watts (2009); CR is the conservatism ratio measure of Callen et al. (2010) computed as the earnings surprise divided by earnings news. NOA is negative cumulative nonoperating accruals over the sample period deflated by beginning total assets, multiplied by negative one, as in Givoly and Hayn (2000). A detailed definition of the variables can be found in Table A1

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