Inventories,credit transactions,and the marginal effective tax rate

It is observed that marginal effective tax rates (METR), as conventionally calculated, can only consider working capital requirements to a limited extent. A formula is derived to incorporate inventory requirements into the calculation and, via a numerical example, it is shown that such an incorporation can radically alter METRs from those conventionally calculated. The analysis is extended to credit transactions without affecting the above conclusion. Thus, if METRs are to be used as a means of evaluating the effects of tax policy on the incentive to invest, working capital requirements need to be explicitly allowed for.     

The valuation of projects under the dividend imputation tax system

This paper proves that a modified weighted average cost of capital (“WACC”) valuation methodology is a rigorous and practicable method of valuing projects and companies under the Australian dividend imputation tax system. This methodology uses an effective tax rate in calculating both the discount rate and the ungeared after tax cash flow. A cash flow after effective corporate tax is shown to be equivalent to a cash plus value of imputation credit stream. Importantly, this valuation methodology is applicable to returns that are non-uniform and of finite duration. Also examined is the discounting of equity returns at the company's cost of equity capital. A worked example is presented to clarify and quantify the effects discussed.     

Dividend payouts and catering to demands: Evidence from a dividend tax reform

Utilizing the 2012 dividend tax reform in China, this paper examines how firms make dividend payout decisions that cater to the controlling shareholders' demand, especially when controlling shareholders and outside minority shareholders have different dividend preferences. We find that firms increase dividend payouts when controlling shareholders demand higher dividends after the dividend tax reform. In particular, firms pay higher dividends when facing increased demand from controlling shareholders than when the demand is from minority investors. In addition, we find that firms that increase dividend payments due to the controlling shareholders' demand subsequently have more debt financing and poorer firm performance, suggesting that catering to the demands from controlling shareholders is subject to the Type II agency problem.     

Adapting the APV valuation methodology and the beta gearing formula to the dividend imputation tax system

This paper adapts the APV valuation methodology and the formula for gearing beta to the Australian dividend imputation tax system. The APV formulation is shown to be able to be applied in the dividend imputation tax system by simply replacing the statutory tax rate with an effective tax rate in the calculation of the “cash flows”. The effect of the dividend imputation tax system on a company's value is shown to be easily bounded using the APV formulation by making the extreme assumption that imputation credits are either: fully distributed and fully valued by the market; or that they are worthless. This paper also quantifies the effect of changing the assumed value of imputation credits on: (i) the value of the interest tax shield of debt; and (ii) the levered, or equity, beta.     

Dividend reductions,the timing of dividend payments and information content

Australian companies pay dividends semi-annually with smaller “interim” payments and larger “final” payments. Interim dividends are declared and paid within a less full information environment than final dividends. We analyze the interactions between the timing of dividends and their information content, controlling for share repurchase and tax effects. Dividend reductions that are not associated with share repurchases are statistically significantly related to future abnormal earnings and provide strong support for the information content of dividend reductions. The percentage of dividend reduction is stronger for interim than for final dividend reductions. The market reaction is negatively related to the reduction in imputation tax credit and reacts more aggressively and negatively to interim as compared to final dividend reductions.     

Taxes,transactions costs and the clientele effect of dividends

This paper is an empirical investigation into the extent to which transactions costs and taxes influence individual investors' portfolios. Using actual portfolio and demoraphic data made available by the Individual Investor Research Project at Purdue University, this study finds evidence of a significant dividend clientele effect. Reasonable proxy variables used to measure time preferences and tax rates in part explain the cross sectional variability of investors' portfolio dividend yields. The variables that are most important in influencing the individual's dividend decision are age, and a measure of the investor's differential tax rate on dividends and capital gains.     

Endogenous informed trading in the presence of trading costs: Theory and evidence

The basic premise of the model we propose is that market frictions (trading costs) force traders with market-wide information to strategically choose which securities to trade in. We study the effect of recognizing trading costs on the choices of informed traders and the resulting statistical properties of security prices. Specifically, we show that (1) stocks with intermediate β's have the least informative prices, even though they are traded by the greatest number of informed traders; (2) for high β securities, the contemporaneous correlation of prices is close to the correlation in fundamental values; (3) a security with a higher β, higher volume of liquidity trading and lower idiosyncratic variance is more likely to lead another security. With market capitalization as a proxy for the level of liquidity trading, these specific predictions of the model on the lead–lag relationship are also shown to be strongly supported by the data.     

Taxes and dividend clientele: Evidence from trading and ownership structure

Although dividend clientele have been studied over several decades, their existence remains controversial. We study the interaction of dividends and taxes by exploiting a unique dataset from Taiwan, where the capital gains tax is zero. We find strong evidence of a clientele effect. Agents subject to high rates of taxation on dividends tend to hold stocks with lower dividends and sell (buy) stocks that raise (lower) dividends. Agents in lower tax brackets behave in the opposite manner. After legalization of repurchases in 2000, firms with higher concentrations of more heavily taxed shareholders were more apt to begin repurchase programs.     

Deregulation,tax reform,and the use of consumer credit

This article analyzes the probable effects of recent deregulation of consumer credit markets and tax reform on household credit-use decisions. The results of the analysis suggest that deregulation of rates of charge for consumer credit contracts accounts for a substantial portion of the increase in consumer credit outstanding relative to household income since 1982. The effect would not originate from the extention of credit in newly deregulated markets to households that had not been able to get credit before (widening of credit use). Rather, it would come from the provision of greater amounts of credit to borrowers in general (deepening of credit use). With regard to tax reform, the probability of debt use is significantly higher for those households most likely to itemize deductions for federal income tax purposes. Holding the level of interest rates constant, tax reform that removes the deductibility of consumer interest is not expected to affect the amount of credit used relative to income but is expected to have a significant effect on the type of debt used by such households. They will likely be early adopters of home equity lines of credit. Their shift from consumer to mortage credit is expected to have a long-term negative effect on the credit quality of consumer credit portfolios.This work was partially supported by the Credit Research Center. Purdue University, West Lafayette, IN 47907.     

Transaction costs, trading volume, and the liquidity premium

In a market with one safe and one risky asset, an investor with a long horizon, constant investment opportunities and constant relative risk aversion trades with small proportional transaction costs. We derive explicit formulas for the optimal investment policy, its implied welfare, liquidity premium, and trading volume. At the first order, the liquidity premium equals the spread, times share turnover, times a universal constant. The results are robust to consumption and finite horizons. We exploit the equivalence of the transaction cost market to another frictionless market, with a shadow risky asset, in which investment opportunities are stochastic. The shadow price is also found explicitly.     

Dividend policy,creditor rights,and the agency costs of debt

We show that country-level creditor rights influence dividend policies around the world by establishing the balance of power between debt and equity claimants. Creditors demand and managers consent to a more restrictive payout policy as a substitute for weak creditor rights in an effort to minimize the firm's agency costs of debt. Using a sample of 120,507 firm-years from 52 countries, we find that both the probability and amount of dividend payouts are significantly lower in countries with poor creditor rights. A reduction in the creditor rights index from its highest value to its lowest value implies a 41% reduction in the probability of paying a dividend, and a 60% reduction in dividend payout ratios. These results are robust to numerous control variables, sample variations, model specifications, and alternative hypotheses. We also show that the agency costs of debt play a more decisive role in determining dividend policies than the previously documented agency costs of equity. Overall, our findings contribute to the growing literature arguing that creditors exert significant influence over corporate decision-making outside of bankruptcy.     

Speculative trading,prospect theory and transaction costs

A speculative agent with prospect theory preference chooses the optimal time to purchase and then to sell an indivisible risky asset to maximise the expected utility of the round-trip profit net of transaction costs. The optimisation problem is formulated as a sequential optimal stopping problem, and we provide a complete characterisation of the solution. Depending on the preference and market parameters, the optimal strategy can be “buy and hold”, “buy low, sell high”, “buy high, sell higher” or “no trading”. Behavioural preference and market friction interact in a subtle way which yields surprising implications on the agent’s trading patterns. For example, increasing the market entry fee does not necessarily curb speculative trading, but instead may induce a higher reference point under which the agent becomes more risk-seeking and in turn is more likely to trade.

     

Adverse selection, volume and transactions around dividend announcements in a continuous auction system

We show that liquidity providers do not significantly respond to changes in information asymmetry risks, at least when we analyse their trading behaviour around dividend announcements of a representative sample of stocks in a continuous auction trading mechanism. the implicit bid-ask spread does not seem to change beyond what is normally conveyed through an increased number of transactions. We also document that the information in the trading behaviour of investors is primarily contained in the number of daily transactions.     

Four facts about dividend payouts and the 2003 tax cut

Recent literature has claimed that the 2003 U.S. dividend tax cut caused a large increase in aggregate dividend payouts. I document four simple facts that call this claim into question. First, the post-tax cut increase in dividend payouts coincided with a surge in corporate profits, such that the dividend payout ratio did not rise. Second, share repurchases increased even more rapidly than dividend payouts. Third, dividend payouts by Real Estate Investment Trusts also rose sharply, even though they did not qualify for reduced taxation. Finally, the stock market was forecasting an increase in dividend initiations by mid-2002, before the tax cut had been proposed.     

Insiders' profits,costs of trading,and market efficiency

This study investigates the anomalous findings of the previous insider trading studies that any investor can earn abnormal profits by reading the Official Summary. Availability of abnormal profits to insiders, availability of abnormal profits to outsiders who imitate insiders, determinants of insiders' predictive ability, and effect of insider trading on costs of trading for other investors are examined by using approximately 60,000 insider sale and purchase transactions from 1975 to 1981. Implications for market efficiency and evaluation of abnormal profits to active trading strategies are discussed.     

Interaction of credit and liquidity risks: Modelling and valuation

In this paper we discuss the interaction of default risk and liquidity risk on pricing financial contracts. We show that two risks are almost indistinguishable if the underlying contract has non-negative values; however, if it can take both positive and negative values then these two risks demand different risk premiums depending on their loss rates and distributions. We discuss a structural default model and a discrete time default model with exponentially distributed liquidity shocks. We show that short-term yield spreads are dominated by liquidity risk rather than credit risk. We suggest a two-stage procedure to calibrate the model with one scalar optimization problem and one linear programming problem.     

Order preferencing, adverse-selection costs, and the probability of information-based trading

Although prior studies offer various conjectures on the causes and consequences of order preferencing, there is only limited empirical evidence. In this study, we show that the extent of order preferencing is significantly and negatively related to both the adverse-selection component of the spread and the probability of information-based trading. This result is consistent with the prediction of the clientele-pricing hypothesis that dealers (brokers) selectively purchase (internalize) orders based on information content. Our results suggest that order preferencing may not be as harmful as some researchers have suggested and offer some rationale for its prevalence in securities markets with heterogeneously informed traders. JEL Classification G18 · G19     

SMEs' tax compliance costs and IT adoption: the case of a value-added tax

The objective of this study is to examine the factors behind the adoption of a tax-compliant accounting system among small and medium-sized enterprises (SMEs) using the technological–organizational–environmental (TOE) framework, particularly the role of tax compliance costs in fostering the adoption of this system. This study makes a novel contribution by attempting to link the influence of tax compliance costs to the information technology (IT) adoption literature. Questionnaires were distributed to 401 SMEs, and data were analyzed using partial least squares. The results suggest that the TOE framework is useful for examining factors that affect SMEs' IT adoption decisions; the influence of perceived compatibility, complexity, relative advantage, and mimetic and regulatory pressure is important for the adoption of a value-added tax (VAT)-compliant accounting system. Moreover, the impact of compatibility, learning from external sources, and perceived coercive pressure on the adoption of a VAT-compliant accounting system is moderated by tax compliance cost.     

Implied tax rates and the valuation of discount bonds

Discount bonds afford the investor the opportunity for capital gains. If for tax reasons the market is segmented on the demand side, investors in lower and lower tax brackets must be attracted when interest rates rise and the supply of discount bonds increases. Changes in the differential tax on capital gains and interest income also should affect relative demand. Testing these hypotheses with U.S. Treasury bond data, the implied tax rate is found to vary over time in a manner consistent with market segmentation and tax law changes.