The effect of management incentives and cross-listing status on the accounting treatment of R&D spending

This paper investigates the effect of management incentives and cross-listing status on the accounting treatment of research and development (R&D) spending for a sample of Canadian hi-tech and biopharmaceutical firms. U.S. GAAP adopts an immediate expensing rule for all R&D spending except for software development costs for which technological feasibility has been established. Contrary to the U.S., Canadian and international standard setters recommend capitalization if development costs meet certain criteria. Because those criteria are largely based on management judgment, capitalization of R&D spending is an accounting choice that can be used for income manipulation or signaling.Using a logit model, we examine how the decision to capitalize R&D spending is influenced by the cross-listing status and several other key firm characteristics that are well documented in the accounting literature. We find that the probability of capitalizing R&D spending increases for cross-listed and non-cross-listed firms in the software industry. The probability of capitalizing R&D spending also increases for firms that are more leveraged, more mature, and have higher level of cash flows from operations. However, the probability of capitalizing R&D spending decreases for larger corporations, firms with more concentrated ownership and highly profitable firms. Overall our results indicate a preference for Canadian firms in the software industry to emulate U.S. accounting practices for R&D spending. They also suggest that firms use the decision to capitalize or expense R&D spending as an earning management tool to either meet debt covenants or to smooth income.     

There's something about saving …

The paper considers how people should plan their saving, given certain assumptions about inheritance and changes in household circumstances. The results are produced by a model that takes into account tax and state benefits as well as various private savings vehicles. It concludes that, for many households, saving for retirement through a ‘pension’ might not be optimum and that the best strategy is to vary the incidence and allocation of saving in response to changes in household circumstances.     

Uncertainty and the Cost of Reversal

For standard irreversibility theory the prospect of acquiring better information in the future should induce more flexible decisions: the “irreversibility effect”. This result relies on the definition of an irreversible position as one that would be technically or economically impossible to reverse. In practice, many positions can be reversed at an affordable cost. In this case an increase in informativeness alone is not enough to bias decisions in favour of more flexibility. We look for restrictions on decision sets, information structures and preferences that make possible to study the effect of information on flexibility. JEL Classification No: D81, D9     

Das Anspruchserhebungsprinzip — ein Deckungskonzept in der Haftpflichtversicherung mit Zukunft?

The claims made principle is one possibility to define the trigger of an insurance contract. Until now, the question whether the claims made principle is valid pursuant to German law has never been reviewed. Sec. 149 of the German Act on Insurance Contracts acknowledges the claims made principle.Particularly for long tail risks, the claims made principle has substantial advantages compared to traditional policy concepts.     

Mutual fund expenses: Evidence on the effect of distribution channels

This paper employs a new set of variables in examining the determinants of fund expenses. The Finnish Association of Mutual Funds requires the industry to disclose new variables such as turnover and tracking error from 2002. Using this information the authors examine whether bank-managed funds are managed more actively than their non-bank competitors, which would explain their higher management fees. Equity and balanced funds distributed through bank offices charge higher expense ratios than funds distributed through independent fund management companies. The results suggest that existing customer relationship, bank cross-selling and convenience rather than operational expenses contribute to fund selection of bank mutual fund customers.     

Tax competition and the international distribution of firm ownership: an invariance result

How does the international distribution of firm ownership affect the outcomes of tax/subsidy competition for mobile plants? As corporate ownership becomes increasingly globalised, this question becomes increasingly important for policy. We prove a strong invariance result in the context of the tax/subsidy competition between two host countries for a monopoly firm’s plant. Both the equilibrium plant location and the equilibrium tax/subsidy offers are independent of the international distribution of the firm’s ownership. The reason is that the tax/subsidy competition equalises the firm’s post-tax profits across countries, making owners of capital indifferent towards the location of production.     

Does reduced trade tax revenue affect government spending patterns?

Many skeptics of trade liberalization in the developing world argue that lowering trade taxes can cause significant fiscal pressures in countries particularly reliant on these taxes and result in a reallocation of resources away from important development goals. This paper evaluates whether there is evidence that central governments systematically change the composition of spending priorities in the wake of lowered trade tax revenues as a share of total government revenues. We find no systematic evidence for this concern in a sample of 51 developing countries for the 1991 through 2005 period.     

Gendiagnostikgesetz und Versicherung: Anspruch und Wirklichkeit

With the new German Gene Diagnostic Act (Gendiagnostikgesetz) the legislator aims at improving the protection of insurance applicants by prohibiting private insurers from collecting and using genetic information. However, the analysis of the new provisions shows that the provisions pertaining to insurance neither provide a comprehensive protection against genetic discrimination of insurance applicants and insured nor do they protect their right of gene-informational self-determination. Cuts of insurance benefits of the insured in private health insurance as well as incoherent disclosure obligations for insurance applicants unconstitutionally limit the rights of affected people as compared to the time before the Gene Diagnostic Act came into force. In summary, the new Gene Diagnostic Act does not only fail to meet its claims and thus falls short of the expectations, but also, due to numerous unclear provisions, poses a series of grave problems for insurance applicants, privately insured and private insurers.     

Can long-term performance plans mitigate the negative effects of stock consideration and high cash for acquirers?

Following Travlos (J Finance 42: 943–963, 1987), Loughran and Vijh (J Finance 52: 1765–1790, 1997), Harford (J Finance 54: 1969–1997, 1999), and Oler (Rev Acc Stud 13: 479–511, 2008), we investigate whether acquisitions involving stock consideration and acquirers with high cash levels are associated with poor performance or not. In addition, we investigate whether including a long-term performance plan in top management’s compensation package can mitigate these negative effects. We find that acquirers with a long-term performance plan are less likely to hold a high cash balance and are less likely to use stock consideration, thus avoiding scenarios that are more likely to be value-destructive. Even if an acquirer with a long-term performance plan carries a high cash balance or uses stock, we find that the plan is associated with improved fundamental performance; however, this relationship does not flow through to improved post-acquisition returns.