nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2010‒04‒11
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Accounting alchemy By Robert E Verrecchia
  2. Opting for Opting In? An Evaluation of the European Commission’s Proposals for Reforming VAT on Financial Services By de la Feria, Rita; Lockwood, Ben
  3. Illiquidity and all its friends By Jean Tirole
  4. Tax compliance under tax regime changes By Heinemann, Friedrich; Kocher, Martin G.
  5. Liquidity-saving mechanisms in collateral-based RTGS payment systems By Marius Jurgilas; Antoine Martin
  6. Is agglomeration taxable? By Jordi Jofre-Monseny
  7. Financial intermediation and the post-crisis financial system By Hyun Song Shin
  8. Accruals, Investment and Errors-in-Variables By Christian Calmès; Denis Cormier; Francois Racicot; Raymond Théoret
  9. Timing of death and the repeal of the Swedish inheritance tax By Eliason, Marcus; Ohlsson, Henry
  10. On the political economy of tax limits By Stephen Calabrese; Dennis Epple

  1. By: Robert E Verrecchia
    Abstract: The controversy about the choice among accounting alternatives is often based on arguments suggesting heuristic behaviour by market participants and firm managers. Debates focus on whether accounting methodology systematically alters reported earnings and whether this effect may add or subtract economic value independently of any effect on underlying cash flows. Arguments based on heuristic behaviour of firms’ management and investors influence decisions about the applicability of standards and regulation.
    Keywords: earnings reporting; heuristic behaviour; fair value; disclosure
    Date: 2010–03
  2. By: de la Feria, Rita (Centre for Business Taxation, University of Oxford); Lockwood, Ben (Department of Economics, University of Warwick and CEPR Fellow)
    Abstract: This paper provides a legal and economic analysis of the European Commission’s recent proposals for reforming the application of VAT to financial services, with particular focus on their “third pillar”, under which firms would be allowed to opt-into taxation on exempt insurance and financial services. From a legal perspective, we show that the proposals’ “first and second pillar” would give rise to considerable interpretative and qualification problems, resulting in as much complexity and legal uncertainty as the current regime. Equally, an option to tax could potentially follow significantly different legal designs, which would give rise to discrepancies in the application of the option amongst Member States. On the economic side, we show that quite generally, when firms cannot coordinate their behaviour, they have an individual incentive to opt-in on business-to-business (B2B) transactions, but not on business-to-consumer (B2C) transactions. We also show that opting in eliminates the cost disadvantage that EU financial services firms face in competing with foreign firms for B2B sales. But, these results do not hold if firms can coordinate their behaviour. An estimate of the upper bound on the amount of tax revenue that might be lost from allowing opting-in is provided for a number of EU countries.
    Date: 2010
  3. By: Jean Tirole
    Abstract: The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity and analyses how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyses optimal combinations thereof; it stresses the need for macro-prudential policies.
    Keywords: liquidity, contagion, bailouts, regulation
    Date: 2010–03
  4. By: Heinemann, Friedrich; Kocher, Martin G.
    Abstract: In this paper we focus on the compliance effects of tax regime changes. According to the economic model of tax evasion, a tax reform should affect compliance through its impact on tax rates and incentives. Our findings demonstrate the importance of at least two further effects not covered by the traditional model: First, reform losers tend to evade more taxes after the reform. Second, a reform from a proportionate to a progressive system decreases compliance compared to a switch in the reverse direction. However, the level of compliance is generally higher under a progressive than under a proportionate regime.
    Keywords: tax reforms; tax compliance; experiment
    JEL: C72 C91 H26
    Date: 2010–03
  5. By: Marius Jurgilas; Antoine Martin
    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: Payment systems ; Bank liquidity
    Date: 2010
  6. By: Jordi Jofre-Monseny (University of Barcelona & IEB)
    Abstract: Several theoretical papers that examine tax competition with agglomeration effects have stressed the possibility that the governments of jurisdictions in which economic activity is concentrated may tax firms more heavily (taxable agglomeration rents). In this paper, we examine the tax rate setting decisions taken with regard to the Spanish municipal business tax (Impuesto sobre Actividades Económicas). The analysis, carried out with a sample of 2,772 municipalities, focuses on the effect that urbanization economies, localization economies and the market potential of municipalities have on their business tax rates. High urbanization economies and high localization economies are found to increase the business tax rate. Although the evidence is weaker, the results also indicate that municipalities with better access to demand (of consumers) set higher tax rates
    Keywords: Local taxes, agglomeration economies, tax competition
    JEL: H3 H7 R
    Date: 2010
  7. By: Hyun Song Shin
    Abstract: Securitization was meant to disperse credit risk to those who were better able to bear it. In practice, securitization appears to have concentrated the risks in the financial intermediary sector itself. This paper outlines an accounting framework for the financial system for assessing the impact of securitization on financial stability. If securitization leads to the lengthening of intermediation chains, then risks becomes concentrated in the intermediary sector with damaging consequences for financial stability. Covered bonds are one form of securitization that do not fall foul of this principle. I discuss the role of countercyclial capital requirements and the Spanish-style statistical provisioning in mitigating the harmful effects of lengthening intermediation chains.
    Keywords: leverage, financial intermediation chains, financial stability
    Date: 2010–03
  8. By: Christian Calmès (Département des sciences administratives, Université du Québec (Outaouais), et Chaire d'information financière et organisationnelle, ESG-UQAM); Denis Cormier (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM); Francois Racicot (Département des sciences administratives, Université du Québec (Outaouais), et Chaire d'information financière et organisationnelle, ESG-UQAM); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM)
    Abstract: We formulate well-known discretionary accruals models in an investment setting. Given that accruals basically consist of short-term investment, we introduce, (i) cash-flows, as a proxy for financial constraints and other financial markets imperfections, and (ii) Tobin’s q as a measure of capital return. Accounting data and Tobin’s q being measured with errors, we propose an econometric method based on a modified version of the Hausman artificial regression which features an optimal weighting matrix of higher moments instrumental variable estimators. The empirical results suggest that all the key parameters of the discretionary accruals models studied are biased systematically with measurement errors.
    Keywords: Discretionary accruals; Earnings management; Investment; Measurement errors; Higher moments; Instrumental variable estimators.
    JEL: M41 C12 D92
    Date: 2010–01–01
  9. By: Eliason, Marcus (Institute of Labour Market Policy Evaluation); Ohlsson, Henry (Department of Economics)
    Abstract: Does taxation affect the timing of death? This is an interesting example of how behavior might be affected by economic incentives. We study how two changes in Swedish inheritance taxation 2003/04 and 2004/05 have affected mortality during the turns of the years. Our first main result is that deceased with estates taxable for legal heirs were 10 percentage points more likely to have died on New Year’s Day 2005, from when the inheritance tax was repealed, rather than on New Year’s Eve 2004, compared to deceased without taxable estates for legal heirs. The second main result is that deceased with estates taxable for a married spouse were 12 percentage points more likely to have died on New Year’s Day 2004, from when the inheritance tax between spouses was repealed, rather than on New Year’s Eve 2003, compared to deceased without taxable estates for a married spouse.
    Keywords: behavioral response to taxes; timing of death; estate tax; inheritance tax; tax avoidance; mortality
    JEL: H24 H31 I12
    Date: 2010–03–26
  10. By: Stephen Calabrese (Carnegie Mellon University); Dennis Epple (Carnegie Mellon University)
    Abstract: We study the political economy of state limitations on the taxing powers of local governments, investigating the effects of such restriction on housing markets, community composition, and types of taxes and expenditures undertaken by local governments. We characterize equilibrium when voters choose values of multiple policy (tax and expenditure) instruments, finding that tax limitations have very substantial effects on housing prices and the composition of communities. Political support for tax limits comes from suburban voters and from a subset of central-city voters. Support for tax limits come even from residents of communities that are not constrained by the limits.
    Keywords: Tax limits, redistribution, public goods, property tax, income tax, head tax
    JEL: D72 D78 H30 H42 H72 H73
    Date: 2010

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