nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2010‒03‒20
seven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Fair value accounting: villain or innocent victim?: exploring the links between fair value accounting, bank regulatory capital, and the recent financial crisis By Sanders Shaffer
  2. Corporate Lobbying and Financial Performance By Chen, Hui; Parsley, David; Yang, Ya-wen
  3. The Quality of Accounting Information in Politically Connected Firms By Chaney, Paul; Faccio, Mara; Parsley, David
  4. Estimating Cash Flows for Project Appraisal and Firm Valuation By Ignacio Velez Pareja; Joseph Tham
  5. Alternative Basic Income Mechanisms: An Evaluation Exercise with a Microeconometric Model By Colombino, Ugo; Locatelli, Marilena; Narazani, Edlira; O'Donoghue, Cathal
  6. Labor-dependent capital income taxation that encourages work and saving By Sagiri Kitao
  7. The Tax-Foundation Theory of Fiat Money By Dror Goldberg

  1. By: Sanders Shaffer
    Abstract: There is a popular belief that the confluence of bank capital rules and fair value accounting helped trigger the recent financial crisis. The claim is that questionable valuations of long term investments based on prices obtained from illiquid markets created a pro-cyclical effect whereby mark to market adjustments reduced regulatory capital forcing banks to sell off investments which further depressed prices. This ultimately led to bank instability and the credit effects that reached a peak late in 2008. This paper analyzes a sample of large banks to attempt to measure the strength of the link between fair value accounting, regulatory capital rules, pro-cyclicality and financial contagion. The focus is on large banks because they value a significant portion of their balance sheets using fair value. They also hold investment portfolios that contain illiquid assets in large enough volumes to possibly affect the market in a pro-cyclical fashion. The analysis is based on a review of recent historical financial data. The analysis does not reveal a clear link for most banks in the sample, but rather suggests that there may have been other more significant factors putting stress on bank regulatory capital.
    Keywords: Global financial crisis ; Bank capital ; Banks and banking - Accounting
    Date: 2010
  2. By: Chen, Hui; Parsley, David; Yang, Ya-wen
    Abstract: Corporate lobbying activities are designed to influence legislators and thus to further company goals by encouraging favorable policies and/or outcomes. Using data made available by the Lobbying Disclosure Act of 1995, this study examines corporate lobbying activities from a financial perspective. We find that on average, lobbying is positively related to accounting and market measures of financial performance. These results are robust across a number of empirical specifications and continue to hold when we account for potential sample selection. We also report market performance evidence using a portfolio approach. We find that portfolios of firms with the highest lobbying intensities significantly outperform their benchmarks in the three years following portfolio formation.
    Keywords: Corporate Lobbying; accounting performance; market returns; portfolio
    JEL: G30 G10
    Date: 2010–01
  3. By: Chaney, Paul; Faccio, Mara; Parsley, David
    Abstract: We document that the quality of earnings reported by politically connected firms is significantly poorer than that of similar non-connected companies. Moreover, we find that earnings quality has no predictive power for the likelihood of establishing connections. Hence, we rule out that our results (on average) are simply due to firms with ex-ante poor earnings quality establishing connections more often. Instead, our results suggest that, because of a lesser need to respond to market pressures to increase the quality of information, connected companies can afford disclosing lower quality accounting information. In particular, lower quality reported earnings is associated with a higher cost of debt only for the non-politically connected firms in the sample.
    Keywords: political Ties; information quality
    JEL: G1 G3
    Date: 2009–12
  4. By: Ignacio Velez Pareja; Joseph Tham
    Abstract: This teaching note is devoted to the definition and calculation of cash flows, namely, cash flow to debt, (CFD), cash flow to equity, (CFE), capital cash flow, (CCF), tax savings, (TS) and free cash flow, (FCF). We use the direct and the indirect methods to derive the relevant cash flow profiles for the different stakeholders. These cash flows are the basis for the valuation of a firm or project.
    Date: 2010–03–03
  5. By: Colombino, Ugo (University of Turin); Locatelli, Marilena (University of Turin); Narazani, Edlira (University of Turin); O'Donoghue, Cathal (Teagasc Rural Economy Research Centre)
    Abstract: We develop and estimate a microeconometric model of household labour supply in four European countries representative of different economies and welfare policy regimes: Denmark, Italy, Portugal and the United Kingdom. We then simulate, under the constraint of constant total net tax revenue (fiscal neutrality), the effects of various hypothetical tax-transfer reforms which include alternative versions of a Basic Income policy: Guaranteed Minimum Income, Work Fare, Participation Basic Income and Universal Basic Income. We produce indexes and criteria according to which the reforms can be ranked and compared to the current tax-transfer systems. The exercise can be considered as one of empirical optimal taxation, where the optimization problem is solved computationally rather than analytically. It turns out that many versions of the Basic Income policies would be superior to the current system. The most successful policies are those involving non means-tested versions of basic income (Universal or Participation Basic Income) and adopting progressive tax-rules. If – besides the fiscal neutrality constraint – also other constraints are considered, such as the implied top marginal top tax rate or the effect on female labour supply, the picture changes: unconditional policies remain optimal and feasible in Denmark and the UK; instead in Italy and Portugal universal policies appear to be too costly in terms of implied top marginal tax rates and in terms of adverse effects on female participation, and conditional policies such as Work-Fare, emerge as more desirable.
    Keywords: minimum guaranteed income, work fare, participation basic income, universal basic income, models of labour supply, tax reforms, welfare evaluation, optimal taxation
    JEL: C25 H24 H31 I38
    Date: 2010–02
  6. By: Sagiri Kitao
    Abstract: This paper proposes a simple mechanism of capital taxation that is negatively correlated with labor supply. Using a life-cycle model of heterogeneous agents, I show that this tax scheme provides a strong work incentive when households possess large assets and high productivity later in the life cycle, when they would otherwise work less. This reformed system also adds to the saving motive and raises aggregate capital. Moreover, the increased economic activities expand the tax base, and the revenue-neutral reform results in a lower average tax rate. My findings show that this tax scheme improves long-run welfare and that the majority of current generations would experience a welfare gain from a transition to the reformed system.
    Keywords: Labor supply ; Taxation ; Labor productivity ; Saving and investment ; Income tax
    Date: 2010
  7. By: Dror Goldberg (Department of Economics, Bar Ilan University)
    Abstract: A government can promote the use of an object as the general medium of exchange by accepting it in tax payments. I prove this old claim in a dynamic model and compare the mechanism to convertibility. The government can often keep its favourite money in circulation even while increasing its quantity and thus causing it to decrease in value. This opens the door for an inflationary policy. Most successful fiat moneys have been acceptable for tax payments, typically due to legal tender laws. Numerous historical failures of fiat moneys are consistent with the theory.
    Date: 2009–04

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