Taxation and corruption: theory and firm-level evidence from Uganda

This article develops a simple framework to analyse the negotiation over bribe and tax payments during the tax collection process. We show that the larger the bribe a firm offers to a tax collector, the larger the tax rebate it gets. More particularly, we show that the negotiation over bribe and tax payments hinges on four other factors: firms’ official liabilities, detection, firms’ negotiation power and red tape costs imposed on firms. Some of the predictions from the theoretical model are tested using firm-level data from Uganda. We find that bribe and tax payments are inversely related, thereby supporting the hypothesis of a negotiation taking place between firms and tax collectors. In particular, a 1% point increase in average bribe payments per employee is associated with a 7% point reduction in average amount of tax payments per employee. Results are robust to various instruments dealing with the endogenous relationship between bribes and taxes.     

Determinants of corporate default risk in China: The role of financial constraints

Corporate default risk can affect financial stability and the macroeconomy. However, the determinants of corporate default risk in China are not well defined in the literature. We address this issue by using a rich credit event dataset of 981 Chinese listed firms over the period 1998–2013 and study the factors that affect default risk. We demonstrate that leverage, liquidity, firm size are the key firm-specific factors in determining default risk in China, along with macroeconomic factors like interest rate and stock return. Moreover, ‘Too big to fail’ only applies to non-SOEs, as default risk of SOEs is not affected by the firm size. We further find that high liquidity fails to reduce firms default risk, because small-sized firms which are financially constrained have limited cash to prevent financial distress, whereas large firms with greater cash holdings are able to mitigate their default risk as they are unconstrained.     

Risk sharing and export performance with firm heterogeneity

We investigate how market uncertainty affects the export performance of a firm through financial frictions. We first extend Melitz's (2003) heterogeneous firm trade model by incorporating demand shocks, linking the demand uncertainties to the financing costs of firms. In this extension, the default probability is endogenously determined by a firm's productivity and demand uncertainty. Hence, firms with higher productivity or lower market uncertainty are offered lower interest rates and thus show better export performance. As an application, we also show that a risk-sharing mechanism, that pools default risk for a certain group of firms, lowers the default risk. This mechanism allows banks to charge lower interest rates to the member firms and therefore ultimately improves their export performance in both extensive and intensive margins. We find a real-world example of such a mechanism from business groups in Korea. Using Korean firm-level data, we show that the more diversified the business group, the greater the likelihood that its member firms export and the bigger their export revenues. We also show that our results are robust to alternative explanations for Korean business groups’ export competitiveness.     

企业避税与年报可读性

避税活动加剧了企业的信息不对称，管理层在信息披露中是否会采用晦涩的文本信息掩盖避税行为？本文利用2008—2017年中国A股上市公司数据，考察企业避税对年报可读性的影响及其机制。结果发现，避税活动越多，企业年报采用的复杂词汇就越多，年报可读性就越差。在运用工具变量弱化内生性问题、更替年报可读性指标与企业避税指标、考虑递延所得税信息披露和税收政策影响等一系列稳健性检验后，避税行为降低企业年报可读性的结论依然成立。机制分析发现会计信息质量在避税行为对年报可读性的影响中发挥了部分中介作用，避税活动通过降低会计信息质量削弱了年报可读性，信息披露中文本信息与数字信息相配合的观点从企业避税视角得到了验证。此外，在无税收优惠、递延所得税负债较多和外部治理环境较差的企业中，避税降低年报可读性的现象更为明显。因此，规范企业税收制度能够减少企业避税、限制管理层寻租行为，促进税收透明化，从而提高企业的信息披露质量。     

Taxes versus quantities for a stock pollutant with endogenous abatement costs and asymmetric information

We compare emissions taxes and quotas when a (strategic) regulator and (non-strategic) firms have asymmetric information about abatement costs, and all agents use Markov perfect decision rules. Firms make investment decisions that affect their future abatement costs. For general functional forms, firms’ investment policy is information-constrained efficient when the regulator uses a quota, but not when the regulator uses an emissions tax. This advantage of quotas over emissions taxes has not previously been recognized. For a special functional form (linear–quadratic) both policies are constrained efficient. Using numerical methods, we find that a tax has some advantages in this case.     

A Note on Emissions Taxes and Incomplete Information

In contrast with what we perceive is the conventional wisdom about setting a second-best emissions tax to control a uniformly mixed pollutant under uncertainty, we demonstrate that setting a uniform tax equal to expected marginal damage is not generally efficient under incomplete information about firms’ abatement costs and damages from pollution. We show that efficient taxes will deviate from expected marginal damage if marginal damage is increasing and there is uncertainty about the slopes of the marginal abatement costs of regulated firms. Moreover, tax rates will vary across firms if a regulator can use observable firm-level characteristics to gain some information about how the firms’ marginal abatement costs vary.     

Reaching for the stars: the appointment of celebrities to corporate boards

For a sample of over 700 celebrity appointments to corporate boards of directors over the period 1985–2006, we find positive excess market returns at the time of their announcement. The 1-, 2-, and 3-year long-run performance of the appointing firms provide corroborating evidence of the value of these appointments. We conclude that the appointment of celebrities as directors increase a firm’s visibility in a fashion consistent with Merton’s (J Finance 42:483–510, 1987) investor recognition hypothesis.     

Quality competition and entry: a media market case

In this paper, we study the optimal tax policy in a differential oligopoly game where the competing firms share the access to a productive renewable resource. We show that, in a Feedback Nash Equilibrium of the game, a linear Markov tax, imposed on the output, and specified as an affine function of the available resource stock, leads the competing firms to produce the socially optimal quantities over time, thus overcoming the dynamic interplay between the tragedy of the commons and the firms’ market power. The optimal tax turns out to be independent from the resource stock in a monopoly, and it cannot be defined in a duopoly.     

On comparing the accuracy of default predictions in the rating industry

We consider 1927 borrowers from 54 countries who had a credit rating by both Moody’s and S&P at the end of 1998, and their subsequent default history up to the end of 2002. Viewing bond ratings as predicted probabilities of default, we consider partial orderings among competing probability forecasters and show that Moody’s and S&P cannot be ordered according to any of these. Therefore, the relative performance of the agencies depends crucially on the way in which probability predictions are compared.     

Financial and economic determinants of firm default

This paper investigates the relevance of financial and economic variables as determinants of firm default. Our analysis covers a large sample of medium-sized limited liability firms. Since default might lead, through bankruptcy or radical restructuring, to firm’s exit, our work also relates to previous contributions on industrial demography. Using non parametric tests we assess to what extent defaulting firms differ from the non-defaulting group. Bootstrap probit regressions confirm that economic variables, in addition to standard financial indicators, play both a long and short term effect. Our findings are robust with respect to the inclusion of Distance to Default and risk ratings among the regressors.     

The tax advantage of public firms over private firms in the German household solid waste disposal industry

We measure the tax advantage of public firms over private firms, which operate at municipality level in the German household solid waste disposal industry. Public firms with sovereign duties pay no taxes, but equivalent private firms have to. In a simple risk-free setting, we develop a measure of the percentage difference of the charges of both types of firms demanded under their respective tax treatments. We model a cost-covering public firm and a net present value maximizing private firm. For sensible model parameters from the German waste disposal industry the private firm has to demand an about 16% to 18% higher charge. The by far biggest impact on the measure has the value added tax, with revenues as a much larger tax base than profits. Tax savings, which directly affect pre-tax profits, only alleviate the disadvantage bit. There is some evidence that at least one type of private firms—that is, private law firms that are also majority privately owned, are productive enough to overcome the tax advantage of public firms and be able to charge a lower price than public firms.     

Distress cost and corporate financing policy: evidence from the equity options market

This study examines the link between distress cost and corporate financing policy through the lens of the equity options market. Four features stand out. First, the cost of distress is comparable to the tax shield from debt financing. Second, the results provide evidence that ordinary least-squares estimates understate the impact of market leverage on default risk. Third, consistent with the information models of debt maturity, firms with higher default probability use more long-term debt. Finally, more distressed firms rely on secured debt to a greater extent. Overall, the results support the trade-off theory of capital structure.     

Tax Amnesties In A Dynamic Model of Tax Evasion

We present a dynamic model of tax evasion, where tax liabilities last for two periods and the probability of an inspection decreases with the sum of taxes evaded this period plus taxes evaded last period. We show that a tax amnesty that pardons more than the evasion penalties (an extensive amnesty) can temporarily improve compliance. Whenever the inspection technology improves, steady state compliance also improves, but the economy takes time to transit from one steady state to the other. We show that an amnesty may accelerate this transit, or even make it instantaneous if the amnesty is extensive enough.     

Adoption of Pollution Prevention Techniques: The Role of Management Systems and Regulatory Pressures

This paper investigates the extent to which firm level technological change that reduces unregulated emissions is driven by regulatory pressures, and firms’ technological and organizational capabilities. Using a treatment effects model with panel data for a sample of S&P 500 firms over the period 1994–1996, we find that organizational change in the form of Total Quality Environmental Management leads firms to adopt pollution prevention practices, after controlling for the effects of various regulatory pressures and firm-specific characteristics. We find that the threat of anticipated regulations and the presence of ‘complementary assets’ is important for creating the incentives and an internal capacity to undertake incremental adoption of pollution prevention techniques.     

An Empirical Analysis of the Effects on Firms’ Economic Performance of Implementing Environmental Management Systems

This paper investigates whether environmental management system (EMS) implementation influences a firm’s value added, one of the indices of economic performance. Because it is expected that EMS implementation increases a firm’s value added through an increase in demand and an improvement in productivity, a simple model to identify how these effects influence a firm’s value added is developed and is empirically investigated using panel data for Japanese manufacturing firms in the period 1996–2007. The main findings are as follows. For the full sample, EMS implementation increases a firm’s value added through an increase in demand and improvement in productivity. Among these firms, however, the positive effect of the implementation through an increase in demand mainly exists for export-oriented firms. At the industry level, the effects of EMS implementation vary among different industries. These results empirically prove that there are plural paths for EMS implementation to improve a firm’s economic performance.     

The direct incidence of corporate income tax on wages

A stylised model is provided to show how the direct effect of corporate income tax on wages can be identified in a bargaining framework using cross-company variation in tax liabilities, conditional on value added per employee. Using data on 55,082 companies located in nine European countries over the period 1996–2003, we estimate the long run elasticity of the wage bill with respect to taxation to be ?0.093. Evaluated at the mean, this implies that an exogenous rise of $1 in tax would reduce the wage bill by 49 cents. Only a weak evidence of a difference for multinational companies is found.     

On the optimality and sustainability of Turkey’s current account

We analyze Turkey’s current account optimality and sustainability between 1992 and 2004. Using the intertemporal benchmark model for Turkey’s current account we test for its intertemporal solvency. Based on traditional and alternative tests (which account for persistence in the current account), we conclude that Turkey breached the intertemporal solvency condition in the sample period. In addition, stationarity tests of the deviation between actual and optimal net external liabilities series confirm that Turkey’s current account deficit was unsustainable for that period. However, further econometric investigation and analysis of reforms causes us to question our conclusions of non-optimality and unsustainability of the Turkish current account for the latter part of the period. We are indebted to two anonymous referees for insightful comments and suggestions. We would also like to thank seminar participants at Middle Eastern Technical University, Ankara, Turkey, for comments on an earlier version of this paper. Responsibility for all errors remains with the authors.     

Analyzing the role of mutual guarantee societies on bank capital requirements for small and medium-sized enterprises

This paper analyzes the impact of the guarantee provided by mutual guarantee societies (MGSs) on the risk premium that banks should charge for small- and medium-sized enterprise (SME) loans under the new Basel Capital Accords (Basel II and III). We also examine whether the foreseeable decrease in the theoretical credit risk premium would be compensated by the cost of the MGS guarantee. To do so, we develop a rating system for SMEs that uses a large sample of Spanish firms over the period from 2005 to 2009. We find that the final effect of the guarantee on the SME risk premium depends on the values taken by the credit variables of the MGS (essentially, the probability of default).     

Value of tax benefits of a dynamic debt policy with regime switching

The article presents a method for valuation of stochastic future income with three barriers: a default barrier, a pre-default barrier and a refinancing barrier. Between the pre-default and default barriers, there is an ongoing cost of financial distress. In this framework, we derive state-dependent present value factors that can be applied to problems of valuation of firms, optimal financial structure and mitigation of agency conflicts between managers and investors. We illustrate our method with an analysis of the value of tax benefits of a dynamic debt policy.     

Bargaining and Devolution in the Upper Guadiana Basin

Increasingly, central governments approach contentious natural resource allocation problems by devolving partial decision-making responsibility to local stakeholders. This paper conceptualizes devolution as a three-stage process and uses a simulation model calibrated to real-world conditions to analyze devolution in Spain’s Upper Guadiana Basin. The Spanish national government has proposed spending over a billion euros to reverse a 30 year decline in groundwater levels. We investigate how the government can most effectively allocate this money to improve water levels by utilizing its power to set the structure of a local negotiation process. Using a numerical Nash model of local bargaining, we find that if the national government creates appropriate incentives, local bargaining can produce water stabilization. The actual water levels that will emerge are highly dependent on the central government’s decisions about the budget available to local stakeholders and the default policy, which will be influenced by the relative value the government places on various financial and environmental outcomes. Our paper concludes by determining the relationship between these relative valuations and the government’s preferences over water levels.