nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2006‒05‒27
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The Dark Side of Good Corporate Governance: By Miguel Segoviano; Thomas Kirchmaier
  2. Executive financial incentives and payout policy: firm responses to the 2003 dividend tax cut By Jeffrey R. Brown; Nellie Liang; Scott Weisbenner
  3. Taxing consumption in Jamaica By Kelly Edmiston; Richard M. Bird
  4. Non-linear adjustments in fiscal policy By Gabriella Legrenzi; Costas Milas
  5. Inside and outside money By Ricardo Lagos
  6. Disagreement in Partners’ Reports of Financial Difficulty By Robert Breunig; Deborah Cobb-Clark; Xiaodong Gong; Danielle Venn
  7. Tax Evasion and Self-Employment in a High-Tax Country: Evidence from Sweden By Engström, Per; Holmlund, Bertil
  8. Legal capital: an outdated concept By John Armour

  1. By: Miguel Segoviano; Thomas Kirchmaier
    Abstract: We argue on theoretical grounds that obligatory compliance with stricter financial reporting rules (e.g. the US Sabanes-Oxley Act) may entail important unintended consequences. Paradoxically, the amount of misreporting may increase because corporate boards spend more valuable resources fulfilling statutory mandates rather than involving themselves in forward-looking strategy setting, As these surveillance devices are substitute methods of gauging management quality, when boards focus on the firm's internal control and accounting system they become semi-detached from strategy - their business acumen falters. Top executives are then judged primarily on the basis of financial metrics as opposed to long-term fit. Since the balance sheet review carries more weight in the board's decision-making process, the return to managerial book-cooking (a purely ¶influence¶ activity) and the risk of endorsing flawed business plans swell. This confirms a burgeoning sentiment among business leaders and scholars that boards should perhaps pay less rather than more heed to codified, verifiable 'good ' governance principles.JEL classification: D23, G30, K20, M21, M40.Keywords: Corporate  Governance, Earnings Manipulation, Auditing, Misreporting, Sarbanes-Oxley Act, Combined Code on Corporate Governance
    Date: 2006–05
  2. By: Jeffrey R. Brown; Nellie Liang; Scott Weisbenner
    Abstract: Using the 2003 reduction in dividend tax rates to identify an exogenous change in the after-tax value of dividends to shareholders, we test whether stock holdings among company executives is an important determinant of payout policy. We have three primary findings. First, we find that when top executives have greater stock ownership, and thus an incentive to increase dividends for personal liquidity reasons, there is a significantly greater likelihood of a dividend increase following the 2003 dividend tax cut, whereas no such relation existed in the prior decade when the dividend tax rate was much higher. This finding is strongest for dividend initiations, and is robust to a rich set of firm and shareholder characteristics. Second, we provide evidence that approximately one-third of the firms that initiated dividends in 2003, a higher share than in previous years, scaled back share repurchases by an amount sufficient to reduce their total payouts. This offset potentially raised the total tax burden on shareholders at these firms because share repurchases are still tax-advantaged relative to dividends. Third, we find that while dividend-paying firms with a larger fraction of individual shareholders had greater stock price gains in response to the tax cut, the market appears to have at least partially anticipated that executives with high stock ownership might raise dividends at the expense of share repurchases and increase the average tax burden for individuals, which is consistent with the presence of agency conflicts within the firm.
    Keywords: Dividends ; Taxation
    Date: 2006
  3. By: Kelly Edmiston; Richard M. Bird
    Abstract: In Jamaica, as in most countries, consumption taxes in the form of a value-added tax called the General Consumption Tax (GCT) and several excise taxes collectively known as the Special Consumption Tax (SCT) are critically important revenue sources, accounting for 37.4 percent of total revenues in fiscal year 2003/04 (27.7 percent for GCT alone) and an estimated 11.2 percent of GDP (8.3 percent for GCT alone). This paper first describes in some detail the present structure and administration of the GCT and SCT and then evaluates the performance of these taxes from several angles -- as revenue generators, with respect to their distributional effects and their relation to the shadow economic, their administrative aspect, and in international perspective. It concludes by setting out a number of recommendations for reform.
    Keywords: Jamaica ; Value-added tax
    Date: 2006
  4. By: Gabriella Legrenzi (Keele University, Department of Economics); Costas Milas (Keele University, Department of Economics)
    Abstract: We apply non-linear error-correction models to the analysis of fiscal policy. Our empirical analysis, based on Italy, shows that the burden of correcting budgetary disequilibria is entirely carried by changes in taxes, rather than changes in government spending or policy mixes. On the other hand, the tax instrument displays rigidities, as taxes are downward inflexible not only with respect to their long-run level, but also during periods of decreasing economic growth. As a consequence, structural expenditure reforms aiming at a higher degree of government expenditure adjustment are needed. This would also relax the asymmetries reported in the paper.
    Keywords: General government expenditure, general government revenues, budgetary disequilibria, persistence profile, asymmetries.
    JEL: C32 C51 C52 H20 H50
    Date: 2005–02
  5. By: Ricardo Lagos
    Abstract: A distinction is drawn between outside money—money that is either of a fiat nature or backed by some asset that is not in zero net supply within the private sector—and inside money, which is an asset backed by any form of private credit that circulates as a medium of exchange.
    Date: 2006
  6. By: Robert Breunig; Deborah Cobb-Clark; Xiaodong Gong; Danielle Venn
    Abstract: We use unique data in which both partners report about household finances to demonstrate that there is often disagreement about whether the household has experienced financial difficulty in the past year. Four alternative explanations for this disagreement are tested using the data. The results indicate that disagreement may be related to the severity of the underlying material hardship rather than to gender differences or individual (as opposed to household) views of financial difficulty. We find only weak evidence that information asymmetries explain couple disagreement about financial difficulty. This implies that standard surveys which collect information about the household’s financial position from a representative individual may fail to completely characterize the nature of material hardship.
    Keywords: Household Finances, Survey Methodology, Material Hardship
    JEL: C42 D14 I31
    Date: 2006–04
  7. By: Engström, Per (Department of Economics); Holmlund, Bertil (Department of Economics)
    Abstract: Self-employed individuals have arguably greater opportunities than wage earners to underreport their incomes. The incentives for underreporting should be especially strong in an economy with generally high taxes. This paper uses recent income and expenditure data to examine the extent of underreporting of income among self-employed individuals in Sweden. A key hypothesis is that underreporting of incomes among the self-employed would be visible in the data as “excess food consumption”, for a given level of observed income. Our results confirm the underreporting hypothesis. In particular, we estimate that households with at least one self-employed member underreport their total incomes by around 30 percent. Under-reporting appears to be twice as prevalent among self-employed people with unincorporated businesses as among those with incorporated businesses.
    Keywords: Tax evasion; self-employment; Engel curves
    JEL: D12 H24 H25 H26
    Date: 2006–05–17
  8. By: John Armour
    Abstract: This paper reviews the case for and against mandatory legal capital rules. It is argued that legal capital is no longer an appropriate means of safeguarding creditors' interests. This is most clearly the case as regards mandatory rules. Moreover, it is suggested that even an 'opt in' (or default) legal capital regime is unlikely to be a useful mechanism. However, the advent of regulatory arbitrage in European corporate law will provide a way of gathering information regarding investors' preferences in relation to such rules. Those creditor protection rules that do not further the interests of adjusting creditors will become subject to competitive pressures. Legislatures will be faced with the task of designing mandatory rules to deal with the issues raised by Ônon-adjustingÕ creditors in a proportionate and effective manner, consistent with the Gebhard formula.
    Keywords: Corporate Law, Creditor Protection, Legal Capital, Regulatory Competition
    JEL: G32 G38 K12 K22
    Date: 2006–03

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