The effect of pension accounting on corporate pension asset allocation

We examine the impact of new pension disclosures and subsequent full pension recognition under FRS 17 and IAS 19 in the United Kingdom and SFAS 158 in the United States on pension asset allocation. These standards require recognition of net pension surplus/deficit on the balance sheet and actuarial gains/losses in other comprehensive income. Therefore, these standards introduce volatility into comprehensive income and balance sheets. We identify a disclosure period during which UK companies disclosed all the required data under FRS 17 in the notes without recognition. We also identify a full recognition period starting 1 year before until 1 year after the adoption of FRS 17/IAS 19 (UK) and SFAS 158 (US). We predict and find that UK companies, on average, shifted pension assets from equity to debt securities during both the disclosure and the full recognition periods. We also find that while before the adoption of SFAS 158 US companies maintained a stable allocation to equities and bonds, these companies, on average, shifted funds from equities to bonds around the adoption of SFAS 158. Cross-sectional analysis shows that the shift away from equities is related to changes in funding levels, shorter investment horizons, increased financial leverage, and the expected impact of the new standards on shareholders’ equity.     

“两税合一”对台湾上市公司股利税资本化的影响

本文以1994～2001年两税合一税制实施前后的台湾上市公司为样本，运用Harris-Kemsley股利税后收益模型，探讨所得税制改革对权益投资者收益的影响，以及两税合一税制的实施对股利税资本化的影响。实证结果表明：两税合一税制实施前，台湾上市公司的末分配盈余与其股利税资本化程度负相关，即股利税资本化效果存在；两税合一税制实施后，台湾上市公司的股利税资本化程度低于两税合一前的程度。     

Do dividend tax cuts lead firms to increase dividends: Evidence from China

Dividend taxation is an important component of investors’ taxes and has attracted the attention of policymakers and financial economists. However, the theory of dividends and the reform of dividend taxation remain a puzzle. This paper analyzes the effect of dividend taxation on firms’ dividend policies. Using a natural experiment and difference-in-difference estimation, we find that China’s dividend tax cut in 2005 led firms to increase their dividend payments. Companies with higher proportions of tradable individual shares or investment fund shares were more likely to increase their dividend payments. However, opportunistic behavior also exists, where companies with higher proportions of shares held by executives were also more likely to increase their dividend payments. These findings support the existence of a causal relationship between China’s tax cut and firms’ increased dividend payments and imply that the reform of dividend taxation in 2005 achieved its goal.     

Valuation of companies and projects under differential personal taxation

This paper develops formulae for the valuation of companies and projects where there is both differential personal taxation of dividends and interest arising from dividend imputation, and differential taxation of interest and capital gains. The former has been addressed in the literature. This paper represents an extension to recognize both phenomena. It is also shown that valuation errors from ignoring these phenomena are all significant, with the errors from ignoring the interest/capital gains tax differential being at least as great as those from ignoring imputation. Thus, a valuation formula that allows for both phenomena is indicated.     

Ex-Day Behavior: Tax or Short-Term Trading Effects

This study examines the behavior of share prices around the ex-dividend dates before and after the introduction of the 1988 Income and Corporation Taxes Act that reduced substantially the tax differential between dividends and capital gains in the United Kingdom. We find that, in the pre-1988 period when the differential taxation of dividends and capital gains is high, ex-day returns are positive and significant. In contrast, in the post-1988 period, ex-day returns are, in most cases, negative and insignificant. Further analysis reveals that, while ex-day returns are significantly related to dividend yield and to the length of the settlement period, they are not affected by the commonly used measures of transaction costs, such as the bid-ask spread and trading volume, or by the day of week, month of the year, type of dividend distribution, or number of days to the actual receipt of the cash dividend. We conclude that taxation affects significantly ex-day share prices in the United Kingdom.     

An empirical investigation of the effect of imputation credits on remittance of overseas dividends

Overseas dividend remittance is an important vehicle for multinational corporations (MNCs) to move funds among their global subsidiaries. Using firm-level data from 2001 to 2004 for Taiwan-based MNCs with subsidiaries in China, this paper provides empirical evidence on the effect of imputation credits on overseas dividend remittances. We find that imputation credits have a positive effect on increasing foreign dividend payouts, thereby reducing the efficiency loss induced by the tax cost for within-firm dividends of MNCs. We also document evidence that parent companies’ net fund flows from related-party transactions with their subsidiaries are negatively correlated with dividends repatriated from those affiliates, supporting the notion that transfer-pricing may be substituting for within-firm dividend remittance. Our results contribute to understanding the links between taxation and related-party transactions and subsidiary dividend repatriation decisions of MNCs.     

Institutional Investors and the QE Portfolio Balance Channel

The operation of the portfolio balance channel has been emphasized by monetary policymakers as a key channel through which quantitative easing (QE) policies work. We assess whether the investment behavior of insurance companies and pension funds in the United Kingdom during the global financial crisis was consistent with such an effect by analyzing both sectoral and institution‐level data. Our results suggest QE led to institutional investors shifting their portfolios away from government bonds toward corporate bonds but did not lead to a shift into equities.     

Determinants of Actuarial Valuation Method Changes for Pension Funding and Reporting: Evidence from the UK

This study examines various factors that potentially explain cross‐sectional variations in UK corporate managerial discretion to switch towards a market‐based actuarial pension valuation method for pension funding and reporting purposes. Evidence is based on accounting, actuarial and share market data for an industry‐matched pair sample of 90 UK firms. Consistent with our hypotheses we find that companies have a greater propensity to switch actuarial methods if they use lower discount rates, lower flow funding ratios and sponsor larger pension plans in the pre‐switch valuation year. These findings are consistent with the traditional perspective, which implies that UK corporate switching decisions are explained by characteristics of their defined benefit pension funds. The results run contrary to the findings of earlier US based studies that find that such choices can be explained from an alternative corporate financial perspective.     

Companies' Financial Decisions Under the Distributed Profit Taxation Regime of Estonia

This paper empirically analyzes companies' capital structure and dividend decisions under distributed profit taxation (DPT), Estonia's corporate taxation regime since 2000. The sample covers 26,000 observations of Estonian companies from 1995 to 2004. The results show that the DPT system has led companies to pay less in dividends and retain more profits. Simultaneously, the importance of external financing in companies' total capital has decreased. The undistributed profits appear to be partially retained as surplus cash, instead of being reinvested into long-term productive assets. DPT seems to support companies' liquidity and sustainability; however, the allocation of funds is potentially inefficient.     

Payout Policy Tax Clienteles,Ex‐dividend Day Stock Prices and Trading Behavior in Germany: The Case of the 2001 Tax Reform

This paper examines the impact of the German 2001 tax reform, where Germany switched from a full imputation system to a classical system. Theory suggests that both price drop ratios and trading volume decrease following the reform. We document a significant reduction in the valuation of net dividends–in particular for high dividend yield stocks–and weakening payout policy tax clienteles. Ex‐dividend day returns are likely to be driven by short‐term traders. Though the reform removed incentives for cross‐border dividend stripping and reduced tax heterogeneity among investors, we show that the high trading volume around ex‐dividend days persists.     

Dividends,Taxes, and Signaling: Evidence from Germany

The higher taxation of dividends in the United States gave rise to theories that explain why companies pay dividends. Tax-based signaling models propose that the higher tax on dividends is a necessary condition to make them informative about companies' values. In Germany, where dividends are not tax-disadvantaged and in fact are taxed lower for most investor classes, these models predict that dividends are not informative. However, we find that the stock price reaction to dividend news in Germany is similar to that found in the United States. This suggests other reasons, beyond taxation, that make dividends informative.     

Changes to Income Trust Taxation in Canada: Investor Reaction and Dividend Clientele Theory

Abstract:  This paper explores the relationship between tax-induced dividend clientele theory and the recent changes to the taxation of income trusts in Canada. On October 31, 2006, the Canadian government announced the Tax Fairness Plan ( TFP ) calling for the elimination of the considerable tax advantage enjoyed by income trusts. Generally, distributions from income trusts are now taxed at rates comparable to those imposed on corporate dividends. We examine market reaction to the  TFP  to address three issues: first, whether the valuation effect of a dividend tax increase is consistent with the traditional or the new view of dividend taxation; secondly, whether the market reaction to tax increases has a differential impact on firm value that is related to the tax preferences of taxable, tax-exempt, and foreign investor tax clienteles; and thirdly, whether firms change their dividend policies in response to the preference of institutional investors (tax-based dividend policy effect) or whether institutional investors are sorting themselves across firms based on their dividend policies (investor sorting effect). Our results provide strong evidence as follows. First, the valuation effect in reaction to the  TFP  announcement is consistent with the traditional view of dividend taxation – i.e. that taxes on dividends reduce the net return to investors, increase the firm's cost of capital and lower the firm's ability to access capital markets, thereby discouraging investment and savings. Secondly, we saw that trusts with a larger percentage of their units held by tax-exempt, low-tax, and foreign investors had a higher decline in value when compared with trusts held mostly by ordinary taxable investors. These results support dividend tax clientele theory. Finally, we observed changes in institutional investor clienteles consistent with the investor sorting effect.     

国外养老基金投资规则与绩效的比较

由于政治和人口老龄化对传统的现收现付体制带来的财政压力，养老基金制度改革已经成为一个全球性课题。在一些国家，由于对部分或全部基金型养老基金投资限制的改革，不仅使养老基金行业受益，而且对资本市场发展也产生了积极的影响。本文通过对不同投资监管制度下养老基金投资绩效差异和对资本市场不同影响的分析，探讨中国养老基金投资监管制度的改革方向和政策选择。     

The Impact of Scale,Complexity, and Service Quality on the Administrative Costs of Pension Funds: A Cross‐Country Comparison

Administrative costs per participant appear to vary widely across pension funds in different countries. Using unique data on 90 pension funds over the period 2004–2008, this article examines the impact of scale, the complexity of pension plans, and service quality on the administrative costs of pension funds, and compares those costs across Australia, Canada, the Netherlands, and the United States. We find that, except for Canada, large unused economies of scale exist. Higher service quality and more complex pension plans significantly raise costs. Administrative costs vary significantly across pension fund types, with differences amounting to 100 percent.     

The Role of the Auditor in Modern Society: An Exploratory Essay

This paper examines competing proprietary and political cost arguments for incentives facing managers of different types of Australian and UK pension fund, to voluntarily disclose pension liability information in annual reports sent to their participants. For Australian defined benefit pension funds, the disclosure reveals the fund's actuarial surplus or deficit, which conveys information to participants about the pension fund's ability to generate future cash flows. Tests are conducted on the voluntary reporting practices of a sample of 119 Australian and 100 UK pension funds, using variables which prior research suggests affects their financial valuation and performance. The empirical results support predictions that managerial discretionary disclosure carries proprietary cost implications for Australian defined benefit pension funds, as proxied by their investment risk and funding ratio, and political cost implications for Australian defined contribution and UK defined benefit pension funds, as proxied by their size.     

The Shift to Defined Contribution Pension Plans

Abstract

There has been a strong shift away from defined benefit (DB) pension plans toward defined contribution (DC) pension plans in the United States over the last 20 years. A variety of reasons for this shift have been proposed. In another paper in this issue, Krzysztof Ostaszewski presents a new hypothesis to explain the shift to DC plans in the United States. He argues that the decline in importance of DB plans is due to a shift in the way relative returns to macroeconomic factors of production, that is, capital and labor, are being rewarded in the national economy.

This paper attempts to test the Ostaszewski hypothesis using Canadian data. In Canada there has been only a slight decrease in DB plan coverage. It is shown that the Ostaszewski theory does not fit the Canadian experience well. Instead, it is argued that pension regulation and tax legislation play a crucial role in pension design and reform. It is also argued that the difference in pension regulation and taxation in Canada versus the United States has directly influenced plan sponsors in considering their pension objectives, costs, and risks. Differences in the proportion of the workforce that is unionized may also be important. The paper concludes that pension regulation and taxation are more important variables than are macroeconomic reward systems in the use of DB versus DC pension plans.     

Dividend taxes,employment, and firm productivity

The paper examines the effect of dividend taxation on employment and productivity. I exploit a dividend tax cut of 10 percentage points for closely held private corporations in Sweden. Using data on all closely held Swedish firms with exact information on employees and their wages, I find that firms with limited internal funds increase productivity and wages relative to firms with sufficient internal funds whose investment decisions are less affected by dividend taxes. My findings indicate that dividend taxes constrain firms in investing efficiently. Lower taxes can result in higher capital and labor input and, thus, in higher productivity.     

Direct evidence of dividend tax clienteles

The paper is the first to evaluate the dividend tax clientele hypothesis using a data set of all domestic stock portfolios in the market. We find that investment funds that face a higher effective tax rate on dividend income than on capital gains tilt their portfolios away from dividend-paying stocks. These investors consequently earn a dividend yield that is about 35 basis points lower than that of investors who are tax neutral between dividends and capital gains (pension funds, unit-linked insurance, life insurance). Consistent with tax rules and charter provisions, we also find that private corporations prefer growth stocks, that foundations exhibit strong dividend preferences, and that partnerships rarely hold stocks portfolios.     

养老金改革考验我们经济学的功底和智慧北大核心

本文从四个方面思考中国养老金改革问题。一是指出养老金改革是一个多维复杂的系统。宏观角度涉及养老金缺口问题和资本市场健康发展,微观角度与生产率密切相关。从国际比较来看,中国的老龄化程度比全球平均水平更严重,但养老金储备属于全球较低水平。从增强养老保障可持续性看,可能有延长退休年龄、增加储蓄、减少替代率、增加预筹资金并确保资金保值增值等四种办法。二是提出中国养老金改革的总体框架。本文建议建立一个较为综合的衡量目标,比如G30采用的"终身财务安全度量(Lifetime Financial Security,简称LFS)"的方法,跨部门比较政策效果,讨论维持在同一框架内,避免各说各话。本文还提出,中国养老金制度从DB型转向DC型,可以采取历史还原法和名义账户的办法,解决养老金改革转轨中的代际公平问题,以及城乡差别、所有制差别问题。三是提出"N对1"养老金发放模式与30余个养老金管理机构数量等养老金经营管理设想,并指出养老金投资回报与风险偏好须匹配,结合我国资本项目开放进程考虑养老金全球化投资。四是从住房、民粹主义等非金融领域,延伸思考养老金改革的复杂性。最后,本文总结指出,中国养老金改革是一项考验经济学功底和智慧的重大课题,应从多个维度全面分析、讨论、测算、论证,高度重视养老金改革对相关各方的激励作用,做出大胆有效的改革。