nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2006‒07‒02
six papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Fiscal Reform and its Firm-Level Effects in Eastern Europe and Central Asia By John E. Anderson; ;
  2. Taxable Cash Dividends By Bechman, Ken L.; Raaballe, Johannes
  3. Business groups, taxes and accruals management By Beuselinck,Christof; Deloof,Mark
  4. Die Besteuerung multinationaler Unternehmen By Haufler, Andreas
  5. Cash flow is cash and is a fact. Net income is just an opinion By Fernandez, Pablo
  6. The correct value of tax shields: An analysis of 23 theories By Fernandez, Pablo

  1. By: John E. Anderson; ;
    Abstract: This paper reports the first empirical evidence that fiscal reform efforts in transition countries have positive effects. Using the EBRD BEEPS I and II data, reported in 1999 and 2002, rigorous econometric models are estimated showing that the share of bribes paid to tax collectors is reduced in countries with more extensive fiscal reforms. This effect controls for selection bias in the likelihood that firms are required to make unofficial payments to tax authorities. On the basis of this evidence, we now have some confidence in the success of fiscal reform efforts. In addition, we have insight regarding what forms of fiscal reform may be more successful as the share of revenues generated from direct taxes (both personal and corporate) has an impact on tax bribes.
    Keywords: Fiscal reform, Bribery, Transition economies, Eastern Europe, Central Asia
    JEL: C21 H25 O23 O52
    Date: 2005–08–01
  2. By: Bechman, Ken L. (Department of Finance, Copenhagen Business School); Raaballe, Johannes (Department of Finance, Copenhagen Business School)
    Abstract: Firms pay out cash using both dividends and share repurchases. In many aspects these two means are similar, but one important difference is that dividends are generally taxed more heavily than share repurchases. Nevertheless firms persist in paying out large amounts in dividends. This paper provides an explanation for this dividend puzzle by developing a class of signaling models violating the “single-crossing property in which information about the quality of the firm is asymmetric between the management and the shareholders. In these models a high-quality firm can always signal its quality by using share repurchases only. However, in certain cases share repurchases become costlier on the margin for a high-quality firm than for a low-quality imitator. In such cases, the high-quality firm signals most cost efficiently by means of a combination of share repurchases and taxable cash dividends financed by the issuance of new shares. Taxable cash dividends financed by the issuance of new shares then can be considered a positive kind of money burning whose role is to signal a firm’s high quality. The implications of the models are consistent with several important empirical facts about dividends and share repurchases. Thus, this paper’s main contribution is to examine a range of new signaling models that provides a role for taxable cash dividends and share repurchases and to derive their empirical implications.
    Keywords: Dividends; Share Repurchases; Signaling; Single-Crossing Property; Money Burning
    JEL: D82 G35
    Date: 2006–06–28
  3. By: Beuselinck,Christof; Deloof,Mark (Tilburg University, Center for Economic Research)
    Abstract: This paper provides evidence that Belgian firms belonging to a business group have a lower effective tax rate (ETR) and face a less positive association between pre-tax income and ETRs than independent firms. These findings suggest that individual group members apply efficient tax planning techniques in order to minimize taxes at the group level. We hypothesize that group firms strategically adjust firm-level reported earnings levels in response to tax incentives. We find evidence consistent with this hypothesis, in that the intrinsic negative association between total accruals and operating cash flows is more (less) pronounced for group firms facing a positive (zero) marginal tax rate status, compared to independent firms. In addition, we find that a group firm s net tax-paying situation is more important in its discretionary accruals reporting decisions, compared to independent firms. Finally, we identify intra-group receivables as relevant tax-reducing accruals components. Results are robust to alternative model specifications, variable definitions and measures.
    Keywords: business groups;Effective tax rate;Marginal tax rate;Accruals - Cash Flow Association
    JEL: G32 H21 M41
    Date: 2006
  4. By: Haufler, Andreas
    Abstract: Using simple benchmark models, this paper gives an introductory analysis of three separate policy issues that relate to the taxation of multinational firms: (i) the spread of tax measures that provide discriminatory tax relief to multinational firms; (ii) the switch from the current separate accounting system to a consolidated corporate tax base with formula apportionment; (iii) the introduction of a minimum statutory corporate tax rate in a geographically restricted area. Prior to these analyses, we briefly survey some of the empirical evidence on both the general development of corporate taxation in Europe and the OECD, and on the tax preferences granted to multinational firms.
    Keywords: multinational enterprises; taxation
    JEL: H87 H25 F23
    Date: 2006
  5. By: Fernandez, Pablo (IESE Business School)
    Abstract: A company's profit after tax (or net income) is quite an arbitrary figure, obtained after assuming certain accounting hypotheses regarding expenses and revenues. On the other hand, its cash flow is an objective measure, a single figure that is not subject to any personal criterion. In general, to study a company's situation, it is more useful to operate with the cash flow (equity cash flow, free cash flow or capital cash flow) as it is a single figure, while the net income is one of several that can be obtained, depending on the criteria applied. Profit after tax (PAT) is equal to the equity cash flow when the company is not growing, buys fixed assets for an amount identical to depreciation, keeps debt constant, and only writes off or sells fully depreciated assets. Profit after tax (PAT) is also equal to the equity cash flow when the company collects in cash, pays in cash, holds no stock (this company's working capital requirements are zero), and buys fixed assets for an amount identical to depreciation. When making projections, the dividends and other forecast payments to shareholders must be exactly equal to expected equity cash flows.
    Keywords: Cash flow; Net income; Equity cash flow; Free cash flow; Capital cash flow;
    Date: 2006–05–17
  6. By: Fernandez, Pablo (IESE Business School)
    Abstract: This paper provides guidelines to evaluate the appropriateness of 23 different valuation methods for estimating the present value of tax shields. We first show that the value of tax shields is the difference between the present values of two different cash flows with their own risks: the present value of taxes for the unlevered company and the present value of taxes for the levered company. This implies, as a first guideline, that, for the particular case of a perpetuity and a world without costs of leverage, the value of tax shields is equal to the tax rate times the value of debt. The value of tax shields can be lower when costs of leverage exist. In that case, we show that, since the existence of leverage costs is independent of taxes, a second guideline for the appropriateness of the valuation method should be that the value of tax shields, when there are no taxes, is negative. We then look at the case of constant growth and derive similar conclusions. Second, we identify 23 valuation theories proposed in the literature to estimate the present value of tax shields and illustrate their performance relative to the proposed guidelines. Eight of these theories do not satisfy the two proposed guidelines for the case of perpetuities. Only one of the valuation methods is consistent with these restrictions when we look at the case of constant growth and no leverage costs. Two theories provide consistent valuations when we allow for leverage costs and growth. Finally, we use the 23 theories to value a hypothetical firm and show remarkable differences in the values obtained, which demonstrates the importance of using a method consistent with the proposed guidelines.
    Keywords: value tax shields; valuation theories; valuation methods;
    JEL: G12 G31 M21
    Date: 2006–05–13

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