Comprehensive versus partial deferred tax liabilities and equity market values

This study investigates the value relevance of the deferred tax liability recognized using comprehensive versus partial allocation. Our research examines New Zealand firms who, prior to the introduction of International Financial Reporting Standards, were free to choose between comprehensive and partial allocation. We test the joint hypothesis that the partial, as opposed to comprehensive, deferred tax liability is relevant for equity valuation and is sufficiently reliable to be reflected in investors’ valuation assessments. Our results are consistent with this prediction.     

Voluntary disclosure of operating income

This study investigates whether New Zealand firms’ voluntary disclosure of operating income, which is also known as earnings before interest and tax, in the income statement is related to the investment opportunity set. New Zealand provides an ideal setting to examine this because New Zealand generally accepted accounting principles do not require the disclosure of operating income as an intermediate income number in arriving at net income (earnings) in the income statement. We hypothesize and find evidence that firms with high assets‐in‐place and high leverage are more likely to voluntarily disclose operating income/earnings before interest and tax. However, the assets‐in‐place finding is sensitive to alternative measures of the investment opportunity set.     

Strategies and dividend imputation: the effect of foreign and domestic ownership on average effective tax rates

This study examines how dividend imputation affects the incentive of New Zealand firms to minimize tax. By effectively eliminating double taxation on company income, imputation reduces firms’ incentives to engage in costly tax minimization strategies. Before September 1993, resident and nonresident shareholders were treated differently under New Zealand’s imputation system. Because imputation credits cannot be passed to shareholders unless dividends are paid, we expect firms to pursue different tax paying strategies depending on their level of foreign ownership and their dividend payout ratios. After September 1993 when imputation credits were extended to nonresident portfolio shareholders, we expect that firms with high foreign ownership and high dividend payouts would have less incentive to minimize tax. Our results provide some support for these expectations.     

Book-Tax Differences and Inland Revenue Audit Adjustments in New Zealand

Abstract:  Using confidential data from US manufacturing firms' tax returns and Inland Revenue Service (IRS) audit adjustments, Mills (1998) tests, and finds support for, her hypothesis that IRS audit adjustments increase as the book-tax differences increase. We test Mills' hypothesis using confidential data obtained from the New Zealand Inland Revenue (hereafter Inland Revenue). Confidential data provide the key variable of interest, Inland Revenue's proposed audit adjustment, which is not available from public sources. These data provide the exact audit adjustment amounts, eliminating measurement errors inherent in proxy variables, and enable a temporal alignment of the book-tax differences with the Inland Revenue audit adjustments, thereby enhancing the internal validity of the relation between book-tax differences and Inland Revenue audit adjustments. Because the results of our study using New Zealand data, another time period, a more diverse set of firms, and a different institutional environment are consistent with those of Mills, we argue for the generalizability of Mills' hypothesis that proposed audit adjustments are positively related to the excess of book income over taxable income.     

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.     

Political costs and an intraperiod accounting choice for export tax credits

This study examines the effects of political and debt contracting costs on an intraperiod accounting choice. Export tax credits that New Zealand companies receive may be credited to sales ot to income tax expense. Compared to the credit to sales method, the tax reduction method reduces a company's reported tax rate and interest coverage ratio, both of which could have adverse economic consequences. The results indicate the credit to sales method is preferred by large companies that attract political scrutiny because of their low tax rates. The level of a firm's interest coverage is also related to that accounting choice.     

The volatility of comprehensive income and its association with market risk

Financial statement preparers claim that the ‘excess’ volatility of comprehensive income (CI) confuses financial statement users. We examine the volatility and risk relevance of CI, relative to net income, for a sample of 92 New Zealand nonfinancial firms for the period 2003–2010. The results show that CI is more volatile than net income. However, the volatility of CI incremental to net income is not related to market risk. Furthermore, the incremental volatility of CI does not modify the pricing of net income. These results hold when asset revaluations are excluded from other CI.     

Dividend Imputation and Shareholder Wealth: The Case of New Zealand

On April 1, 1988, New Zealand stopped the double taxation of dividends by implementing a full dividend imputation program. Because many believed that the tax advantage of debt had led to more highly leveraged firms subject to greater financial risk than was socially optimal, it was hoped the removal of incentives to finance with debt would result in a more efficient allocation of capital. The empirical results suggest that the shareholder wealth gain from dividend imputation was more than offset in firms with large debt levels. Moreover, an examination of debt ratios indicates debt levels declined in the post–imputation period.     

How Much Do Taxes Discourage Incorporation?

The double taxation of corporate income should discourage firms from incorporating. We investigate the extent to which the aggregate allocation of assets and taxable income in the United States between corporate and noncorporate firms responds to the size of this tax distortion during the period 1959–1986. In theory, profitable firms should shift out of the corporate sector when the tax distortion is large, and conversely for firms with tax losses. Our empirical results provide strong support for these forecasts, and imply that the resulting excess burden equals 16 percent of business tax revenue.     

Hedging and choice of currency denomination in international syndicated loan markets

We examine the determinants of the currency denomination of debt decision of Australian and New Zealand firms and compare it with that of Asian firms around the 1997 Asian crisis. We control for location choice, and include firm and country specific determinants. We find hedging is the primary determinant of foreign currency borrowing by Australian and New Zealand firms. In Asian firms, however, firm leverage, the exchange rate regime, country political risk, and interest rate differentials determine the currency denomination of debt. With the exception of Hong Kong based firms, there is no support for the hedging hypothesis in Asian firms.     

The Elasticity of Taxable Income in New Zealand*

This paper reports estimates of the elasticity of taxable income with respect to the net‐of‐tax rate for New Zealand taxpayers. The relative stability of the New Zealand personal income tax system, in terms of marginal rates, thresholds and the tax base, provides helpful conditions for deriving these estimates. The elasticity of taxable income was estimated to be substantially higher for the highest income groups. Changes in the timing of income flows for the higher income recipients were found to be an important response to the announcement of a new higher rate bracket. The marginal welfare costs of personal income taxation were consistent across years, being relatively small for all but the higher tax brackets. For the top marginal rate bracket of 39 per cent, the welfare cost of raising an extra dollar of tax revenue was estimated to be well in excess of a dollar. Implications of the findings are that: disincentive effects of high top marginal rates can be substantial even when labour supply responses are small; the welfare costs of increases in top marginal tax rates can be high; and announcement effects of tax policy changes can lead to considerable income shifting between time periods.     

会计信息可比性与劳动收入份额北大核心

利用2006-2019年沪深A股数据,本文考察了会计信息可比性对企业劳动收入份额的影响。研究发现,会计信息可比性的增强显著提高了企业的劳动收入份额,表明会计信息质量的提高有助于员工更好地分享企业的发展成果。进一步研究结果表明,(1)降低资本成本及增大自主研发强度是会计信息可比性提高企业劳动收入份额的两大作用路径;(2)会计信息可比性的增强主要提高了普通雇员的劳动收入份额,对高管劳动收入份额的影响并不显著;(3)会计信息可比性对劳动收入份额的影响存在一定异质性,当企业自身融资约束程度较高、信息透明度较低,或可比公司的会计盈余质量较强时,会计信息可比性与劳动收入份额的正相关关系更强;(4)会计信息可比性通过提高劳动收入份额,提升了企业的价值创造能力。     

Tax Motivated Income Shifting and Korean Business Groups (Chaebol)

Abstract:  This paper examines tax-induced income shifting behavior among affiliated firms in Korean business groups (chaebols). Korean corporate income tax law does not require consolidated tax returns, and business groups with a large number of affiliated member firms have incentives to shift income across member firms to reduce the overall taxes of the group. For a large number of Korean companies that are subject to external audits, we perform univariate and multivariate regression analyses on the income shifting behavior of chaebol firms compared with non-chaebol control firms. Our evidence suggests that tax-motivated income shifting activities exist among chaebol firms, and that the extent of income shifting is found to depend on its effect on non-tax cost factors such as the earnings, leverage, and cash flow rights of the controlling shareholders. We also find that income shifting is more pronounced in chaebol firms where the control-cash flow divergence is relatively large, suggesting that income shifting is affected by the controlling shareholders' opportunism. Our study provides some insights on the intra-group income shifting activities where research is limited.     

Distilling the reserve for uncertain tax positions: the revealing case of black liquor

We examine the extent to which management discretion affects the reserve for unrecognized tax benefits. We analyze the financial statement disclosures of 19 paper companies that received a total of $6.4 billion in refundable excise taxes during 2009. All of these companies included the refunds in financial income, but 14 excluded all or part of the refunds from taxable income. Despite the magnitude and unprecedented nature of the exclusion, we find that only five of the excluding firms accrued a full reserve for an uncertain tax position, three firms accrued a partial reserve, and six firms did not accrue any reserve. This variation suggests managers enjoy wide latitude in applying the more likely than not standard for determining additions to the reserve. Our findings suggest that financial statement users should exercise caution when comparing tax reserves across companies. In addition, we find some evidence that income-increasing tax accrual decisions are related to characteristics generally associated with weak corporate governance.     

Measuring revenue responses to tax rate changes in multi-rate income tax systems: behavioural and structural factors

This paper shows how income changes in response to changes in marginal income tax rates (MTRs) translate into tax revenue changes for the familiar multi-step income tax function used in many countries. Previous literature has focused on the relatively straightforward case of a proportional income tax or the top MTR only. The paper examines revenue responses at both the individual and aggregate levels, and it is shown that for individual MTRs within a multi-rate regime, simple expressions for tax revenue responsiveness can be derived that nevertheless capture the various behavioural and structural responses to income tax reforms involving changes to multiple rates and thresholds. Illustrations are provided using changes to the New Zealand income tax structure in the 2010 budget. This reduced all marginal tax rates while leaving income thresholds unchanged.     

Empirical Evidence on the Implicit Determinants of Compensation in Big 4 Audit Partnerships

This study investigates the implicit financial incentives of individual Big 4 audit partners by examining the association between a partner's compensation and characteristics of the audit firm, audit partner, and individual partner clientele for Big 4 firms in Sweden. Using tax and financial data for individual audit partners and clients, our empirical findings indicate that there is significant variation in the implicit determinants that are associated with compensation across the Big 4. We find that audit partners’ compensation is positively associated with the size of their clientele or the number of publicly traded clients, both of which represent revenue‐generating opportunities. Similarly, compensation and developing an industry specialization are positively related. In three firms, gaining clients is clearly related to an increase in compensation, while losing a client is associated with a reduction in partner income in only one firm. We find that audit partner income is more sensitive to performance‐related incentives, such as attracting new clients, as partners progress in their career. Finally, we find evidence that audit failures, proxied by reporting errors related to issuing a going concern opinion, are associated with lower compensation. These results should be of interest to the auditing profession, audit firms, and regulators when they consider the effects of implicit incentives of partner compensation on audit quality.     

Determinants of Capital Structure and Adjustment to Long Run Target: Evidence From UK Company Panel Data

This paper examines the empirical determinants of borrowing decisions of firms and the role of adjustment process. A partial adjustment model is estimated by GMM estimation procedure using data for an unbalanced panel of 390 UK firms over the period of 1984–1996. Our results suggest that firms have long-term target borrowing ratios and they adjust to their target ratios relatively fast, which might suggest that the costs of being away from their target ratios are significant. The results also provide support for positive impact of size, and negative effects of growth opportunities, liquidity, profitability of firms and non-debt tax shields on the borrowing decisions of companies.     

Corporate Financing Decisions: UK Survey Evidence

Abstract:  Despite theoretical developments in recent years, our understanding of corporate capital structure remains incomplete. Prior empirical research has been dominated by archival regression studies which are limited in their ability to fully reflect the diversity found in practice. The present paper reports on a comprehensive survey of corporate financing decision-making in UK listed companies. A key finding is that firms are heterogeneous in their capital structure policies. About half of the firms seek to maintain a target debt level, consistent with trade-off theory , but 60% claim to follow a financing hierarchy, consistent with pecking order theory . These two theories are not viewed by respondents as either mutually exclusive or exhaustive. Many of the theoretical determinants of debt levels are widely accepted by respondents, in particular the importance of interest tax shield, financial distress, agency costs and also, at least implicitly, information asymmetry. Results also indicate that cross-country institutional differences have a significant impact on financial decisions.     

Capital gains tax,managed funds and the value of dividends: The case of New Zealand

The taxation of capital gains for Managed Investment Funds in New Zealand was abolished in October 2007, putting these entities on a similar footing to private investors. Prior to this change most private investors were not taxed on capital gains from investments in New Zealand companies, whereas Managed Funds were taxed on these gains. New Zealand company dividends carry imputation tax credits and thus had a tax advantage for Managed Funds before October 2007. After the change the value of dividends relative to capital gains declined substantially for Managed Funds. The evidence is that the market value of the dividends, particularly for high dividends, also declined substantially subsequent to the tax change.     

International Corporate Tax Avoidance Practices: Evidence from Australian Firms

This paper examines the international corporate tax avoidance practices of publicly listed Australian firms. Based on a hand-collected sample of 203 publicly listed Australian firms over the 2006–2009 period (812 firm-years), our regression results indicate that there are several practices Australian firms use to aggressively reduce their tax liabilities. Specifically, we find that thin capitalization, transfer pricing, income shifting, multinationality, and tax haven utilization are significantly associated with tax avoidance. In fact, based on the magnitude and significance levels of the regression coefficients in our study, thin capitalization and transfer pricing represent the primary drivers of tax avoidance, whereas income shifting and tax haven utilization are less important. Finally, our additional regression results show that tax havens are likely to be used together with thin capitalization and transfer pricing to maximize international tax avoidance opportunities via the increased complexity of transactions carried out through tax havens.