A fisherian analysis of individual retirement accounts

Conclusions This paper has employed a Fisherian analysis of intertemporal choice to evaluate the use of IRA's. The analysis shows that with perfect capital markets assumptions, the presence of IRA's will generate no other effect on savings than would a simple tax rabate. Further, it shows that if the tax revenue loss due to IRA's is not accompanied by an expenditure reduction, but is financed with taxes or borrowing, rational households will still employ IRA's, but their effect on intertemporal choice will be nil. The analysis also shows that IRA's do act as a savings incentive to the extent that there are market imperfections, specifically to the degree that transactions costs are important. However, empirical evidence from the literature does not lend firm support to this possibility. The conclusion is that a market imperfection is not a firm basis on which to construct savings incentives. Finally, one can note that the same analysis applies to any tax-based savings incentive that is designed to operate by lowering the tax on interest income. The reason for this finding is that the provision of tax sheltered interest income, along with the deductibility of interest on borrowing, creates general tax arbitrage opportunities for households and that tax arbitrage opportunities do not, in general, generate greater savings in an intertemporal choice model. It follows that significant restriction or elimination of the deductibility of interest on borrowing is a prerequisite for IRA's and other tax based savings incentives to produce their intended effect.     

The evolution of pension size in pensioner’s income parameters

Preliminary results from the first stage of the 2002–2008 pension reform, as well as the state of pension provision in the prereform period and their effect on pensioner’s income provision, are examined in terms of a methodological problem in organizing a pension system.     

An Emerging Market's Reaction to Initial Modified Audit Opinions: Evidence from the Shanghai Stock Exchange*

This study investigates the valuation effect of modified audit opinions (MAOs) on the emerging Chinese stock market. Here, the term MAO refers to both qualified opinions and unqualified opinions with explanatory notes. The latter can be considered an alternative form of a qualified opinion in China. The institutional setting in China enables us to find compelling evidence in support of the monitoring role of independent auditing as an institution. First, we find a significantly negative association between MAOs and cumulative abnormal returns after controlling for effects of other concurrent announcements. Further, results from a by‐year analysis suggest that investors did not reach negative consensus about MAOs' valuation effect until the second year, exhibiting the learning process of a market without prior exposure to MAOs. Second, we do not observe significant differences between market reaction to non‐GAAP‐ and GAAP‐violation‐related MAOs. Third, no significant difference is found between market reaction to qualified opinions and market reaction to unqualified opinions with explanatory notes.     

Technological catch-up or resource rents?

This paper studies contribution of capital deepening, technological progress and efficiency improvement to economic growth while focusing on cross-country data, and thus finds itself at the crossroads of growth and development accounting. We take a production frontier approach to growth accounting and choose DEA as the frontier estimation method. To explore the effects that windfall gains from natural resource use have on growth, output data are corrected for pure natural resource rents—part of GDP figures not earned by either labor or capital. Taking into account countries’ natural resources, we find that in the two decades from 1970 to 1990 the average contribution of technological catch-up to per worker output growth was, if anything, negative on the worldwide scale and this trend continued till the mid 1990ies. Analysis of efficiency estimates also shows a possible change over the period of 1970–1990 in the effect of natural resources on country’s performance     

Has International Trade Affected Workers’ Bargaining Power?

In this paper, we investigate whether globalization has affected workers’ bargaining power in the Belgian manufacturing industry over the period 1987–1995 using a sample of more than 20,000 firms. We find little evidence of international trade and inward foreign direct investment having an impact on the workers’ bargaining power. We find some evidence that technological change has a positive impact on the workers’ bargaining power. JEL no. C23, D21, F16, F23, J50, L13     

Last‐Chance Earnings Management: Using the Tax Expense to Meet Analysts' Forecasts*

We assert that the tax expense is a powerful context in which to study earnings management, because it is one of the last accounts closed prior to earnings announcements. Although many pre‐tax accruals must be posted in the year‐end general ledger, managers estimate and negotiate tax expense with their auditors immediately prior to earnings announcements. We hypothesize that changes from third‐ to fourth‐quarter effective tax rates (ETRs) are negatively related to whether and how much a firm's earnings absent tax expense management miss analysts' consensus forecast, a proxy for target earnings. We measure earnings absent tax expense management as actual pre‐tax earnings adjusted for the annual ETR reported at the third quarter. We provide robust evidence that firms lower their projected ETRs when they miss the consensus forecast, which is consistent with firms decreasing their tax expense if non‐tax sources of earnings management are insufficient to achieve targets. We also find that firms that exceed earnings targets increase their ETR, but this effect is less significant. By studying the tax expense in total, rather than narrow components of deferred tax expense, our results provide general evidence that reported taxes are used to manage earnings.     

Japanese Banks’ monitoring activities and the performance of borrower firms: 1981–1996

We construct an index measure that quantitatively describes the monitoring activities of Japanese banks. Using micro data on Japanese banks and borrower firms, we examine the effects of bank monitoring on the profitability of borrower firms. We find significant positive effects in the periods 1986–1991 and 1992–1996, although there is no significant effect in the period 1981–1985. We also examine how banks’ monitoring affects borrowers. The results show that the positive effects of banks’ monitoring on borrowers’ profitability are mostly caused by screening effects, not performance-improving effects.

The Later You Pay,the Higher the k

This paper shows the importance of the age path (life-cycle timing) of any tax for the accumulation of capital in the economy. Income, consumption, and wage taxes differ in their age paths as well as their incentive effects. This paper studies how the differing age path of each tax affects the capital accumulation of the economy in an empirically calibrated life-cycle model. We investigate lump-sum “age” taxes and find in every case that the later the person pays tax, the higher the k of the economy. To analyze the life-cycle timing effect of conventional transactions-based taxes (income, consumption, and wage), we replace each tax with a lump-sum age tax that has the identical age path of tax payments over the life cycle. We find that the timing effect is quantitatively important and often causes the impact of a tax on capital accumulation to be very different from what would be predicted from the incentive effect.     

Price Anomalies in the Used Car Market

Summary Using two different samples – one based on newspaper advertisements, the other Internet-based – we identify some price anomalies in the used car market in the Netherlands. First, prices of used cars depend on their age in calendar years rather than months. Second, there is some evidence that crossing 100,000 km induces a sudden additional price reduction. Third, a new license plate format, something with no intrinsic value whatsoever, increases a car’s price by about 4%. We discuss possible explanations for these results.     

EXPLAINING THE GROWTH OF GOVERNMENT SPENDING IN SOUTH AFRICA

What determines government spending in South Africa? The paper estimates the determinants of real per capita government spending in the Republic of South Africa using annual data for the period 1960‐2007, a tumultuous period during which South Africa experienced a variety of internally imposed changes (e.g. the abolition of apartheid, changes in political institutions) and externally generated shocks (e.g. war, oil shocks). Using multivariate cointegration techniques, we find that per capita government spending, per capita income, the tax share and the wage rate are cointegrated, a result that supports the notion that government spending is associated not only with per capita income and the true cost of government service provision as given by the wage rate but also with the fiscal illusion caused by budget deficits. We also find evidence that per capita government spending was positively affected by external shocks. These external shocks seem to play a significant role in explaining the dynamics of government spending growth.     

Employment and export specialisation along the development path: some robust evidence

This paper contributes to the literature on the evolution of overall specialisation along the process of economic development by simultaneously estimating ‘specialisation curves’ emerging from fully comparable employment and export statistics in a sample of 32 economies (1980–2000). We apply semiparametric estimation methods, which allow us to combine the flexibility of the estimation with the inclusion of country-specific effects, demonstrating that their omission can be the source of contradictions in nonparametrically revealed patterns of diversification along the path of growth. We find no strong support for a U-shaped pattern (which is very sensitive to the methodological setting applied) but rather a robust tendency towards manufacturing despecialisation in the initial phase of economic growth that is confirmed both by export and employment specialisation patterns.     

Information barriers, export promotion institutions, and the extensive margin of trade

This paper assesses the role played by export promotion institutions in shaping the extensive margin of Latin American and Caribbean countries’ exports over the period 1995–2004. We find that the presence of offices of export promotion agencies abroad favors an increase in the number of differentiated goods that are exported, whereas a larger number of diplomatic representations in the importer countries seem to be associated with exports of a larger number of homogeneous goods.     

Measuring Transparency in the Dutch Mortgage Market

Summary This paper is an empirical study of pricing in the Dutch mortgage market. For a narrowly defined set of endowment mortgages (with a fixed lending rate of 10 years), we find that the price dispersion within lenders is larger than the dispersion across lenders. Prices remain dispersed across lenders, even after controlling for characteristics of the borrower, the municipality and the government bond rate. Apparently, the mortgage market is not fully transparent, which impedes competition in the mortgage market. We also find that the price dispersion for mortgages sold by banks is smaller than that for mortgages sold by other lenders. A likely explanation is that lenders using middlemen have higher agency costs. We wish to express our gratitude to the National Mortgage Guarantee (Nationale Hypotheek Garantie) in Zoetermeer, in particular Karel Schiffer and Hans Mersmann, for providing us access to their data as well as for their hospitality. We are grateful to Wim van Assenbergh, Harry Garretsen, Ralph de Haas, Jan Lemmen, Clemens Kool, Job Swank and two anonymous referees of this journal for their comments on previous versions of this article.     

Global Imbalances: Is Germany the New China? A Skeptical View

In this paper we evaluate the current account patterns of China and Germany. We point out that China’s current account surplus as a share of global GDP in recent years resembles that of Germany’s. Yet, an important difference is that the Euro block’s current account inclusive of Germany has overall been balanced, whereas emerging Asia’s current account inclusive of China has mostly been characterized by sizable surpluses. We further find that both China and Germany’s current account surpluses seem to be accounted for by common factors. However we have reasons to doubt the long run viability of these current account trends in future decades. Demographic transitions in China and Germany are projected to reduce their surpluses, and this effect is stronger for Germany. We also discuss plausible reasons to doubt the extent to which the Euro block will move towards significant surplus in the coming years.     

China and the Exports of Other Asian Countries

We analyze the impact of China’s growth on the exports of other Asian countries, distinguishing China’s demand for imports from its penetration of export markets. We account for the endogeneity of Chinese exports by applying instrumental variables in a gravity model with country-pair fixed-effects. We find that China’s crowding-out effect is felt mainly in markets for consumer goods and hence by less-developed Asian countries, not in markets for capital goods or by the more advanced Asian economies. Meanwhile, China has been sucking in imports from its Asian neighbors, but this effect is mainly felt in markets for capital goods. Hence, more and less developed Asian countries are being affected very differently by China’s rise. JEL no. E5, F4     

Innovation and Corporate Tax Planning: The Distinct Effects of Patents and R&D*

Using a large US sample, we find a significant and positive relation between patents and corporate tax planning, and the effect is incremental to the effect of R&D on tax planning. We employ a quasi‐natural experiment based on staggered industry‐level innovation shocks to identify the positive causal effect of patents on corporate tax planning. We also find that patents are not associated with tax planning for domestic firms, but their association with tax planning is concentrated in multinational firms, which have the ability to shift domestic income to low‐tax countries. Moreover, we find that the identified effect mainly exists in the post–check‐the‐box (CTB) rule period when shifting income among affiliates becomes more flexible and convenient. Finally, we use two income‐shifting models and find that patents, rather than R&D, facilitate tax planning through an income‐shifting channel. Overall, our results suggest that R&D and patents facilitate firms' tax planning in distinct ways: R&D facilitates tax planning as intended through tax credits and deductions, whereas patents are used by taxpayers to avoid taxes aggressively through income shifting.     

Aid and Public Finance: A Missing Link?

The present consensus in the literature is that foreign aid does not have the desired positive effects on economic development. This is due in great part to poorly performing public institutions in recipient countries. In order to understand better the causes of this undesirable phenomenon, we examine the relationship between multilateral foreign aid flows and recipient countries’ public finance systems. We construct a new indicator to assess the quality of public finance, the Public Finance Institutions Quality (PFIQ) Index. For our panel of 86 countries, we find that multilateral aid flows have a negative impact on recipient country PFIQ score, whereas exogenous improvements in public finance seem to attract more aid. These results provide insight into the “black box” of governance: failure to turn aid receipts into desired results seems partly attributable to multilateral aid, in its present form, not being suited to improving a country’s public finance institutions. However, international donor organisations do seem to reward exogenous improvements in quality and reliability of public finance systems.     

The Effects of Exposure to Practice Risk on Tax Professionals' Judgements and Recommendations*

Tax professionals are responsible for objectively evaluating tax authorities and evidence relevant to their application and for serving as client advocates. We predict that practice risk — that is, exposure to monetary and nonmonetary costs of making inappropriate recommendations — will affect tax professionals' ability to meet these responsibilities by influencing the manner in which they process information about a tax situation as well as their resulting recommendations for clients. We conduct an experiment in which we manipulate practice risk through client characteristics. We also manipulate provision and nature of outcome information. We find that tax professionals process information differently for clients of different risk levels. Specifically, tax professionals weight negative outcome information more heavily when forming likelihood assessments underlying recommendations for a high‐risk client, relative to a low‐risk client. Further, risk directly affects recommendations in that tax professionals more strongly recommend an aggressive position for a low‐risk client. Differential processing of information for clients with identical transactions but different risk levels may protect the tax professional from the higher expected costs of making inappropriate recommendations to high‐risk clients. However, it indicates that tax professionals do not evaluate evidence objectively for all types of clients.     

Tax Policies and Informal Employment: The Asian Experience

This paper develops and estimates a model linking tax policies to the size of the informal sector. Our results suggest that informal employment responds to the strength of enforcement and, to a lesser extent, to tax rates. Looking across sectors, we find service sector informal employment responds to both changes in tax rates and enforcement, while manufacturing sector informal employment responds only to enforcement. Quantitatively, changes in enforcement affect the manufacturing informal sector more than the service sector. These results are robust to various measures of informal employment and hold for other countries outside of Asia as well. Since informal employment (and hence output) is related to a country's GDP, these results suggest that policy makers should consider the effect of their policies on the size of the informal sector.
JEL classification : O 17; O 53; H 26     

The Ex-Dividend Day Stock Price Behavior: The Case of Portugal

This paper examines the ex-dividend day behavior of stock prices in the Lisbon Stock Market over the period 1990–1998, extending on international evidence and discussing the adequacy of competing theories, considering the Portuguese institutional environment. We find that on the ex-day stock prices fall by less than the dividend, which is in line with the findings of several studies based on US and non-US data. The main contributions of this paper are: (1) the rejection of a tax explanation for the stock price drop, because it is inconsistent with the Portuguese tax regime; (2) considering the very small stock price tick and the fact that dividends are always integer multiples of tick size, the discreteness hypothesis of Bali and Hite (Journal of Financial Economics 47(2):127–159, 1998) is also ruled out as a possible explanation for ex-day price movements. We find no evidence of tax related clientele effects. We propose that ex-day price behavior may be an anomaly, reflecting a less than efficient market with low liquidity levels, price stickiness, and insipid arbitrage trading.