The Informational Effect of Corporate Lobbying Against Proposed Accounting Standards

Accounting standard setting has been described as a highly political process. Different interest groups are often quite ready to criticize any proposed accounting standard and lobby the accounting standard setting body. This study explores the possibility that certain information might be revealed through corporate lobbying behavior. A game-theoretic model is formulated to examine the implications of a proposed accounting standard which, if passed, would require the financial statement recording of some previously undisclosed liabilities. In this model, management has incentive to lobby against the standard and prevent the mandatory reporting of the liabilities. Lobbying against the standard, however, may itself reveal to the market information about the liabilities. Results of the equilibrium analysis show that, because of this informational effect, a company may choose not to lobby even though the company may have a high liability and can be adversely affected by the proposed standard. On the other hand, a company may avoid revealing its liability level if it can adopt the "always-lobby" strategy. Furthermore, a company may not have to lobby at all if it can "free-ride" on other companies' lobbying effort. Companies may even be able to enjoy "free-riding" at least some of the time if each company can share the responsibilities and lobby on a probabilistic and what otherwise may seem like a random basis.     

The effects of agglomeration on tax competition: evidence from a two-regime spatial panel model on French data

This article studies how agglomeration economies affect tax competition between local jurisdictions. We develop a theoretical model with two main testable predictions: in a setting where agglomeration forces lessen the responsiveness of capital to tax, high-regime agglomeration jurisdictions should adopt a rent-taxing behavior, and they should react less to their neighbors’ tax policies. The panel dataset spans the period from 1995 to 2007 and focuses on the local business taxes set at the French mid-subnational jurisdiction level of départements. First, instrumental variables estimates indicate that attractive jurisdictions capture a significant part of firms’ agglomeration rent by levying higher tax rates. An increase by 1% of the localization economies indicator (a specialization index) leads to increasing the business tax rate by 0.43%. Second, local tax setting behaviors are characterized by a mimetic behavior, with best response functions that slope upwards. We propose a two-agglomeration-regime spatial lag model to estimate through ML the relationship between tax competition and attractiveness. Our main result shows that both are linked and tax mimicry is less pronounced if a jurisdiction is agglomerated. Specifically, in response to a decrease in the tax rate of neighboring local governments by 1%, local governments with strong agglomeration economies reduce their tax rate by 0.4% against 0.6% for local government characterized by a low-agglomeration regime. We show that the classical one-size-fits-all-case of a single regime of agglomeration suffers from a 40% downward bias for low-agglomeration jurisdictions. We draw the link to policy praxis by discussing the optimal design of equalization schemes.     

Does Centralization Increase the Size of Government? The Effects of Separation of Powers and Lobbying

Difficulties faced by the Economic and Monetary Union have strengthened the position of those who advocate a process of (further) political integration in the European Union (EU). A widespread fear is, though, that such a process would favor powerful interest groups able to lobby the EU policymakers. Persson and Tabellini (1994) argue that political centralization will increase the size of the government through lobbying because of free-riding incentives created by federally funded programs with localized benefits. We extend their analysis by presenting a model where the budgeting process is divided into two stages, instead of one, which better captures the EU institutional framework. A federal legislator (the Council) chooses the size of the budget at one stage, while a federal agency (the Commission) chooses the allocation of the budget at the next stage. We show that separation of powers in the budgeting process restricts free riding and, therefore, reduces the incentives to lobby. The result is an unchanged budget under centralization. Moreover, it is shown that if the lobbying activity is directed to both policymakers, competitive lobbying may actually reduce the size of the public sector under centralized policymaking.     

Asymmetric tax competition in the presence of lobbying

This paper incorporates the influence of interest groups into the asymmetric tax competition model to explain the phenomenon that small countries do not necessarily set lower capital tax rates than large countries. In addition to the efficiency effect considered by the standard model, which leads the smaller country to set a lower capital tax rate, this present paper also takes account of the political effect arising from lobbying. We show that the smaller country may face less downward political pressure. If the political effect outweighs the efficiency effect, then the smaller country sets a higher tax rate than the larger country. This result has several welfare implications, which are in contrast to the conventional consequences.     

The revenue and base effects of local tax hikes: evidence from a quasi-experiment

Due to a reform of the local equalization scheme in 2003, a set of municipalities in the German state of North Rhine-Westphalia (NRW) increased their local property and business tax rates by one to two percentage points, while the remaining municipalities kept their rates constant. I use this variation across municipalities and over time to study the revenue and base effects of local property and business tax hikes in a generalized difference-in-differences design. The results suggest that the property tax hikes had even in the long-run a revenue elasticity of unity. Accordingly, I find no adverse effects on property tax bases. For the business tax, I find no significant effects on revenues and bases. Furthermore, there are also no effects on broader economic outcomes such as local employment, firms’ wage bill, and property prices. Overall, increasing local tax rates by one to two percentage points does not seem to affect the local economy adversely.

     

Tax competition and tax base equalization in the presence of multiple tax instruments

The literature on tax competition has argued that tax base equalization, which reduces regional disparities in tax bases, can serve as a means of internalizing horizontal and vertical fiscal externalities. This argument assumes that each government relies on a single tax base (a regional tax on mobile capital and a federal tax on savings). This paper considers the case in which a distortionary labor tax is also available. Internalizing fiscal externalities requires that while the regional capital tax base is fully equalized, a region’s equalization entitlement for the labor tax is positive when its tax base is “larger” than the average tax base of all regions. This efficient tax base equalization system is incompatible with the primary objective of fiscal equalization.

     

What drives firms' decisions to lobby and determinants of their lobbying positions: Evidence from firms' comment letter submissions during FASB's stock option expensing proposal in 2004

I examine what drives firms' decisions on whether or not to lobby and, if so, whether to oppose or support FASB's 2004 option expensing proposal. Given that the accounting treatment in place and the political climate were different in 2004 than in 1993, it becomes interesting to examine whether the incentives driving managerial lobbying process have changed. Indeed, in contrast to prior research that finds top managers' option compensation being the main incentive to oppose option expensing in 1993, firms' closeness to debt constraints is the main incentive to oppose option expensing in 2004. I also find that firms that are smaller, that are in an industry with peers who have lobbied, that have board interlocks with firms that have lobbied, and that have higher board independence are more likely to self-select to lobby. While prior accounting lobbying research has examined firms' decisions to lobby and firms' decision on their lobbying positions independently, this study improves on prior research methodology by using a two-level nested logit model and examines both decisions.     

Tax competition and fiscal equalization under corporate income taxation

This paper challenges the view that tax base equalization by the so-called representative tax system (RTS) removes inefficient undertaxation in corporate tax competition. The innovation of the paper is that it focuses on a tax on corporate income, instead of the unit tax on capital considered in previous studies. We employ a tax competition model with fiscal equalization and show that the RTS fails to fully internalize pecuniary and fiscal externalities. As a consequence, the RTS yields inefficiently low tax rates in the Nash equilibrium of the tax competition game between governments. Tax revenue equalization performs even worse, but combined with equalization of private income it implements the efficient tax rates on corporate income.     

The assignment and division of the tax base in a system of hierarchical governments

Vertical externalities, changes in one level of government’s policies that affect the budget of another level of government, may lead to non-optimal government policies. These externalities are associated with tax bases that are shared or “co-occupied” by two levels of government. Here I consider whether co-occupancy of tax bases is desirable. I examine the optimal extent of the tax bases of a lower level of government (local) and a higher level (state). I find that it is optimal to have co-occupancy in the absence of other corrective policies if commodities in the tax bases are substitutes. Further, if the state government can differentially tax the co-occupied segment of the tax base and the segment it alone taxes it will obtain the (second-best) outcome obtained with other policy instruments such as intergovernmental grants.     

Determinants and Effects of Corporate Lobbying

We examine the determinants and value effects of corporate lobbying, controlling for corporate political action committee (PAC) campaign contributions. We find evidence that firms with greater potential payoffs from favorable policy and regulations lobby most actively, and that managers often utilize both lobbying and campaign contribution channels to influence the political climate affecting the firm. We also find that shareholders value the lobbying activities pursued by management on their behalf, particularly if the firm does not have a PAC that contributed to an election campaign. The results are robust to a number of tests designed to mitigate potential omitted‐variable and self‐selection bias.     

The effects of tax rate changes on tax bases and the marginal cost of public funds for Canadian provincial governments

The efficiency losses from taxation vary directly with the responsiveness of a government??s tax bases to tax-rate increases. We estimate the dynamic responses of tax bases to changes in tax rates using aggregate panel data from Canadian provinces over the period 1972 to 2006. Our preferred empirical results indicate that a one percentage point increase in corporate income, personal income, and sales tax rates is associated with a 3.67, 0.76, and 1.17 percent reduction in their respective tax bases in the short run. The corresponding long-run tax base semi-elasticity estimates are higher: ?13.60, ?3.63, and ?3.18, respectively. We use the tax base elasticity estimates to calculate the marginal cost of public funds (MCF) for the provinces?? three major taxes. Our computations indicate that the corporate income had the highest MCF and that the sales tax had the lowest MCF in all provinces in 2006. The MCF for the personal income tax ranged from 1.44 in Alberta to 3.81 in Quebec. Our results imply that there would have been significant welfare gains in 2006 from reductions in provincial corporate income tax rates. Our computations also indicate that the equalization grant formula may reduce the perceived MCF of the provinces that receive these grants, and that increases in provincial corporate and personal income taxes can cause significant reductions in federal tax revenues.     

Local government responsiveness to federal transfers: theory and evidence

Federal transfers can depend on local fiscal capacity which is measured by local tax bases. The aim of this paper is to understand to what extent and how these transfers affect local tax decisions. We develop a model with two provinces producing one mobile good. The good is taxed according to the destination principle. Final consumers decide to buy the good from the province where it is cheaper. The two provinces engage in tax competition. The introduction of scale economies into the shopping technology generates nonlinear tax reaction functions which make it possible to test the effect of a transfer equalizing local tax bases on tax competition in two complementary tax regimes. Used for this purpose are cigarette and gasoline tax data from Canada. In the case of cigarette tax, it is found that nonlinearity in tax competition is almost entirely offset when equalization holds: tax competition in the two tax regimes become closer. The shopping technology for gasoline gives less scope for scale economies, so that equalization does not affect reaction functions.      

Corporate Lobbying on Accounting Standards: Methods, Timing and Perceived Effectiveness

There is a long-standing concern in the literature about the potential importance of non-observable forms of lobbying that may be used by corporate managers to influence accounting standard setting bodies. To date, however, no study has documented their nature or their volume. This study provides such evidence in the context of the U.K.'s Accounting Standards Board (ASB) standard setting process for the period 1991–96. It also provides evidence with respect to the timing at which lobbying activity takes place and its perceived effectiveness by corporate managers. The findings suggest that companies use a variety of lobbying methods, including appeals to their auditors and private meetings with ASB members and staff. Importantly, however, the use of these methods is significantly associated with the use of comment letters; companies which submit comment letters are much more likely to use other methods than companies which do not. Other findings suggest that more companies lobby during the stages of the ASB process at which public consultation takes place (e.g., exposure period of a discussion paper) than at the earlier stages of the process (e.g., agenda formation) which are considered in the literature as the stages at which lobbying can be most effective. With respect to the perceived effectiveness of lobbying, companies which lobbied the ASB considered lobbying to be more effective than companies which did not.     

Corporate lobbying in the UK: an analysis of attitudes towards the ASB's 1995 deferred taxation proposals

This paper models corporate lobbying behaviour with respect to the ASB's 1995 discussion paper on deferred taxation. The study makes improvements to the methodology applied in prior studies. It expands the definition of lobbying beyond the submission of comment letters. It extends the analysis to control for past lobbying behaviour. It uses multinomial logistic regression to consider those companies lobbying in favour, those lobbying against, and those that did not lobby. The findings suggest that size and past lobbying behaviour are key determinants of the decision to lobby. In addition, companies that lobbied against the proposals were more likely to have debt covenants than were those that lobbied in favour. Debt covenants, however, did not explain the difference between non-lobbyists and lobbyists against. Companies that lobbied in favour were more likely to experience incentive compensation effects than were those that lobbied against. There was some evidence of the influence of US listing.     

Agglomeration,tax competition,and fiscal equalization

This paper analyzes the impact of fiscal equalization on asymmetric tax competition when positive agglomeration externalities are present. It uses a model focusing on the strategic reason for capital taxes to demonstrate that per capita fiscal capacity equalization improves the spatial allocation of capital provided a sufficiently rich (marginally) larger region and sufficiently strong agglomeration externalities. If tax revenue is used to finance public goods, per capita fiscal capacity equalization generally cannot simultaneously eliminate public good inefficiency and spatial inefficiency. However, the achievement of full efficiency for ex ante identical regions requires excessive (full) equalization in the presence (absence) of agglomeration externalities.     

Lobbying and Uniform Disclosure Regulation

This study examines the costs and benefits of uniform accounting regulation in the presence of heterogeneous firms that can lobby the regulator. A commitment to uniform regulation reduces economic distortions caused by lobbying by creating a free‐rider problem between lobbying firms at the cost of forcing the same treatment on heterogeneous firms. Resolving this tradeoff, an institutional commitment to uniformity is socially desirable when firms are sufficiently homogeneous or the costs of lobbying to society are large. We show that the regulatory intensity for a given firm can be increasing or decreasing in the degree of uniformity, even though uniformity always reduces lobbying. Our analysis sheds light on the determinants of standard‐setting institutions and their effects on corporate governance and lobbying efforts.     

Does economic policy uncertainty drive the initiation of corporate lobbying?

Economic policy uncertainty (EPU) raises firms' incentives to lobby policymakers to access policy information and influence policy outcomes. Surprisingly, we find that non-lobbying firms are less likely to initiate lobbying during periods of heightened EPU. The evidence is consistent with our time-varying barriers hypothesis that entry barriers to lobbying increase with EPU. We verify that the negative effect of EPU on lobbying initiation arises through the channels of lobbying entry expenses and returns to experience. Furthermore, lobbying entry expenses are not large, implying that the returns to experience channel is likely a more serious barrier preventing non-lobbying firms from initiating lobbying. We also find that facing high lobbying entry barriers, non-lobbying firms go for alternative political activities, such as hiring politically connected directors.     

Investigating corporate management lobbying in the U.K. accounting standard-setting process: a multi-issue/multi-period approach

A large body of literature examines the motives of corporate managers to lobby accounting standard-setters. In general, studies confine their examination to single episodes of the standard-setting process (e.g., exposure draft). This article extends the literature by adopting a multi-issue/multi-period approach to investigate corporate lobbying of the U.K.'s ASB. The findings suggest that the extent of corporate lobbying, defined on the basis of the frequency with which companies made submissions to all of the publications issued by the ASB over a six-year period, depends on the size of companies, the debt covenant costs they face and whether they are listed on a U.S. stock exchange. Separate analyses, however, involving (a) the frequency of lobbying on income-related issues and (b) the frequency of lobbying on disclosure issues revealed that, while all these three variables explain lobbying on income-related issues, only size is significant in explaining lobbying on disclosure issues. The results also suggest that the debt to equity ratio is an imperfect proxy for debt covenant costs.     

Tax Competition and Fiscal Equalization

This paper analyzes the relation between tax competition and fiscal equalization. In particular, it asks the question whether fiscal equalization schemes can mitigate inefficient tax competition. Two transfer schemes are considered: tax revenue and tax base equalization schemes. The paper shows that equalizing transfers may internalize fiscal externalities. In particular, in a small open economy tax base equalization yields efficient tax rates. Thus, transfer mechanisms with an explicit redistributive character do not always impair efficiency.     

The effectiveness and valuation of political tax minimization

We find evidence suggesting that corporate lobbying for tax purposes over the period 1999–2009 is one method by which firms managed corporate taxes. Furthermore, tax management strategies employed by these politically active firms were valued by shareholders. Firms lobbying on tax issues have lower book effective taxes and greater discretionary permanent differences in GAAP and IRS taxable income. Investors place a premium on lobbying activities for tax purposes unless the firm already has a low effective tax rate or very high book-tax differences. We conclude that lobbying political officials is one method by which firms manage risks attendant an aggressive tax strategy.