The Income Splitting Method: Is it Good for Both Marriage Partners?

Abstract. This paper analyzes how deviating from individual taxation affects married couples. The focus is on time allocation, on investment in family‐specific human capital and on distribution of income within the family. Two insights are discussed in detail. First, the distribution of tax‐reduction gains due to the income splitting system depends on whether the family has been started or not. After marriage, joint taxation increases redistribution among family members. Second, although joint taxation reduces the tax burden of the family, it might harm the marriage partner that is more productive in household production provided that potential marriage partners foresee the effects of joint filing on the time allocation within the family.     

Orange County Bankruptcy: Financial Contagion in the Municipal Bond and Bank Equity Markets

We examine the spillover wealth effects of the Orange County, California bankruptcy announcement in December 1994 on municipal bonds, municipal bond funds, and bank stocks. This bankruptcy is prominent because of unprecedented losses and because it was caused by a highly leveraged derivatives strategy rather than a shortage of tax revenues and excess spending. We find contagion in the bond market with significantly negative abnormal returns for municipal bond funds without direct exposure to Orange County and for non‐Orange County municipal bonds. In addition, our findings suggest the contagion spills over to the common stocks of investment and commercial banks that deal in or use derivatives; however, the equities of banks unexposed to derivatives are not affected.     

Indonesian Local Government Spending,Taxing and Saving: An Explanation of Pre‐ and Post‐decentralization Fiscal Outcomes*

As a result of Indonesia's decentralization program, local governments have gained significantly more responsibility for service delivery, considerably larger fiscal resources, and much greater authority over the use of those resources than before. The present paper develops a simple budget model to describe and explain the substantial differences in pre‐ and post‐decentralization local government fiscal behavior related to spending, taxing and saving. During the post‐decentralization period special attention is paid to the fiscal behavior of natural resource rich regions. Among other things, the evidence suggests that: post‐decentralization local government spending is partly responsive to increasing needs and partly the subject of elite capture; local government taxation has become more aggressive under decentralization and appears to be mostly driven by local bureaucratic expectations related to routine overhead budgets; and the increased savings of local governments during the post‐decentralization period is determined to a large degree by delayed central government transfer payments.     

Partial Horizontal Inequity Orderings: A Non‐parametric Approach*

We provide a partial ordering view of horizontal inequity (HI), based on the Lorenz criterion, associated with different post‐tax income distributions and a (bistochastic) non‐parametric estimated benchmark distribution. As a consequence, several measures consistent with the Lorenz criterion can be rationalized. In addition, we establish the so‐called HI transfer principle, which imposes a normative minimum requirement that any HI measure must satisfy. Our proposed HI ordering is consistent with this principle. Moreover, we adopt a cardinal view to decompose the total effect of a tax system into a welfare gain caused by HI‐free income redistribution and a welfare loss caused by HI, without any additive decomposable restriction on the indices. Hence, more robust tests can be applied. Other decompositions in the literature are seen as particular cases.     

The graph of Lindahl correspondence as the unique von Neumann-Morgenstern abstract stable set

In this paper, we consider a continuum economy with a finite number of types of agent, and several private and public goods. The main result of the paper is that the graph of the equal-treatment Lindahl equilibria mapping is the unique abstract stable set with respect to the dominance relation in economies with crowding effects introduced by Vasil'ev et al. in 1995. The external stability of this mapping implies that, for any equal-treatment allocation x in , that is not a Lindahl equilibrium, there exists a subeconomy of such that one of its equal-treatment Lindahl allocations blocks x. This result is a counterpart of the theorem of Mas-Colell for Aumann's atomless market with private goods.     

Short sellers and insider trading profitability: A natural experiment

We examine the impact of short sellers on insider trading profitability using a natural experiment of a pilot program which relaxed short-selling constraints for randomly selected pilot stocks. We find that pilot firms experienced a significant decrease in insider trading profitability during the pilot program. The results are more pronounced for the pilot firms with poor information quality, and for the pilot firms without corporate restrictions on insider trading. Our evidence suggests that short sellers serve an important market disciplinary role by reducing insider trading profitability.     

Terrorism activities and long-term annual management forecasts

We study the effects of terrorist attacks on firms’ long-term annual management earnings forecasts bias. We find that the managers of firms located closer to the epicenters of attacks are more likely to issue optimistic long-term annual earnings forecasts relative to the managers of a control group of unaffected firms. The exposure effect is stronger for more severe terrorist events, and firms with more uncertain fundamentals and less geographic diversification. In addition, we document that managers’ forecast optimism intensifies for firms with stronger negative stock market reaction to the terrorist event, for CEOs with higher ability and for companies that are more likely to issue equity or engage in acquisitions following the terrorist event. Overall, our results are consistent with the idea that long-term annual earnings forecasts are used by managers to counterbalance the short-term pessimistic response to terrorist attacks.     

Governance or reputation? Flexible tax enforcement and excess goodwill: Evidence from the taxpaying credit rating system in China

This study investigates the effect of flexible tax enforcement on firms’ excess goodwill using unique manually collected data on taxpaying credit rating in China from 2014 to 2021. We document that A-rated taxpayer firms have less excess goodwill; A-rated firms reduce excess goodwill by 0.005 vis-a-vis non-A-rated firms, which accounts for 100% of the mean value of excess goodwill. This finding holds after multiple robustness tests and an endogeneity analysis. Moreover, this negative effect is more pronounced in firms with low information transparency, that are non-state-owned and that are located in regions with low tax enforcement intensity. The channel test results suggest that taxpaying credit rating system as flexible tax enforcement reduces firms’ excess goodwill through a reputation-based effect and not a governance-based effect. This study reveals that the taxpaying credit rating system in China as flexible tax enforcement can bring halo effect to A rating firms, thereby limiting irrational M&As and breaking goodwill bubble.     

Does the social security fund help non-financial enterprises to transform from the virtual to the real?

At its 19th National Congress, the Communist Party of China vowed to “strengthen the financial sector’s ability to serve the real economy.” However, many studies provide evidence of the opposite trend, a problematic “transition from the real to the virtual,” among Chinese enterprises. Meanwhile, the investment efficiency of China’s Social Security Fund (SSF), a public fund, attracts much attention. In this context, we use A-share listed companies in China from 2009 to 2018 to study the relationship between holding by the SSF and enterprise financialization. We find that SSF holding significantly inhibits financialization and that this effect is non-linear. Mechanism analysis indicates that SSF holding suppresses enterprises’ financialization mainly by improving their governance. Moreover, SSF holding more strongly inhibits small-scale (vs. large-scale), state-owned (vs. non-state-owned), and non-eastern (vs. eastern) enterprises in China. Furthermore, SSF holding can alleviate corporate value impairment caused by financialization. The conclusions enrich theoretical research and provide empirical evidence that may help regulatory authorities to guide investment by enterprises and prevent financial risks.     

Investment-specific shocks and external balances in a small open economy model

Abstract.  We set up a standard small open economy business cycle model driven by government spending shocks, neutral productivity (TFP) shocks, and investment-specific shocks. The model is calibrated to quarterly Canadian data and its predicted moments and sample paths are compared with their Canadian counterparts. We find that the model captures the dynamics in investment and in the trade balance better than special cases of the model where either one of the productivity shocks is omitted. More specifically, the model matches the variance of the trade balance-output ratio, its correlation with output and its autocorrelation. It also matches the output-investment correlation.