nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2014‒01‒10
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Audits, audit quality and signalling mechanisms: concentrated ownership structures By Marianne, Ojo
  2. Influence of the Expansion of Fair Valuation on the Contracting Role of Accounting: A Normative Study By Yoshihiro Tokuga; Yoko Ota
  3. Intangible-driven value creation: supporting and obstructing factors By Elena Shakina; Maria Molodchik
  4. Swedish Wealth Taxation, 1911–2007 By Du Rietz, Gunnar; Henrekson, Magnus
  5. How should financial intermediation services be taxed? By Ben Lockwood
  6. CFC legislation, passive assets and the impact of the ECJ’s Cadbury-Schweppes decision By Martin Ruf; Alfons J. Weichenrieder
  7. The elasticity of taxable income and income-shifting between tax bases: what is “real” and what is not? By Jarkko Harju; Tuomas Matikka
  8. The investment effect of taxation: evidence from a corporate tax kink By Anne Brockmeyer
  9. Thin capitalization rules and multinational firm capital structure By Jennifer Blouin; Harry Huizinga; Luc Laeven; Gaëtan Nicodème

  1. By: Marianne, Ojo
    Abstract: Do jurisdictions with concentrated ownership structures require less reliance on audits as corporate governance mechanisms and devices? Why do concentrated ownership structures still prevail in certain jurisdictions which are considered to be “market based corporate governance systems”? More importantly, if failures and causes of recent financial crises are principally attributable to the fact that market based corporate governance mechanisms, such as financial regulators, are not optimally performing their functions, why is the role of audits still paramount in such jurisdictions? These are amongst some of the questions which this paper attempts to address. The ever increasing growth of institutional investors in jurisdictions – particularly those jurisdictions with predominantly concentrated ownership structures, with their increased stakes in corporate equity, also raises the issue of accountability and the question as regards whether increased accountability is fostered where institutional investors assume a greater role – as opposed to position which exists where increased stake of family holdings (family controlled structures) arises.
    Keywords: audit quality; corporate governance; concentrated ownership structures; capital market economies; institutional investors
    JEL: D8 E5 G3 K2 M4
    Date: 2013–12–28
  2. By: Yoshihiro Tokuga (Dean, Graduate School of Management, Kyoto University and Professor, Graduate School of Economics, Kyoto University (Email:; Yoko Ota (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper examines the ways of providing information that will enhance the valuation role of accounting while not creating significant problems for its contracting role. Until the global financial crisis beginning in 2008, the accounting standards setters have gradually expanded the scope of fair value accounting. We examine the impact of the expansion of fair valuation on the use of accounting in contracts (private contracts and public regulations) and derive some hypothetical conclusions. First, there will be no significant problems in the contracting role of accounting, if information in the body of financial statements used directly in contracts is able to be revised and adjusted in a way that eliminates unrealized profit and valuation profit or loss with room for management estimation and discretion. Second, if one uses the standard of differences in business models to distinguish, from the perspective of the valuation role, between assets and liabilities subject to fair value measurement and assets and liabilities subject to cost-based measurement, there is considerable overlap between information that plays the valuation role and information that plays the contracting role. Finally, it is also found desirable that risk information, corporate governance information, and other similar information that is useful in contracts but has low verifiability be provided in the form of footnote information, etc. that supplements and complements information in the body of financial statements.
    Keywords: fair value, valuation role, contracting role, executive compensation, financial covenants, dividend restrictions, financial regulation and supervision
    JEL: M41
    Date: 2013–12
  3. By: Elena Shakina (National Research University Higher School of Economics,); Maria Molodchik (National Research University Higher School of Economics,)
    Abstract: This study investigates the factors that support or obstruct market value creation through intangible capital. We explore the impact of intangibles and exogenous shocks on corporate attractiveness for investors measured by Market Value Added (MVA). Specifically we analyze relationship between intangible-driven outperforming of companies, measured by Economic Value Added (EVA) and a number of intangible drivers on macro, meso and micro level. We suppose that the process of value creation is confined not only by companies’ performance. It is established in our study that investment attractiveness is affected by intangibles. Our empirical research is conducted on more than 900 companies from Europe and US during the period of 2005-2009. We found out in this study that a company’s experience, size and innovative focus facilitate value creation. An unexpected result was revealed concerning countries’ education level, which appears to be an obstructive condition for intangible-driven value creation. Our findings extend the understanding of the phenomenon of intangible capital and enable the improvement of investment decision-making
    Keywords: intangibles, economic value added, market value, empirical study.
    JEL: G30 M21
    Date: 2013
  4. By: Du Rietz, Gunnar (Research Institute of Industrial Economics (IFN)); Henrekson, Magnus (Research Institute of Industrial Economics (IFN))
    Abstract: This paper studies the evolution of modern Swedish wealth taxation since its introduction in 1911 until it was abolished in 2007. It offers a thorough description of the rules concerning valuation of assets, deductions/exemptions and tax schedules to characterize effective wealth tax schedules for the period 1911–2006. These rules and schedules are used to calculate marginal and average wealth tax rates for the whole period for a number of differently endowed owners of family firms and individual fortunes. The overall trend in the direct wealth tax was rising until 1971 for owners of large and middle-sized firms and for individuals of similar wealth consisting of non-corporate assets. Average direct wealth tax rates were low until 1934, except for 1913 when a temporary extra progressive defense tax was levied. There were three major tax hikes: in 1934, when the wealth tax was more than doubled, in 1948 when tax rates doubled again and in 1971 for owners of large firms and similarly sized non-corporate fortunes. Effective tax rates peaked in 1973 for owners of large firms and in 1983 for individuals with large non-corporate wealth. Reduction rules limited the wealth tax rates from 1934 for fortunes with high wealth/income ratios. The wealth tax on unlisted net business equity was abolished in 1991. Tax rates for wealthy individuals were decreased in 1991 and in 1992 and then remained at 0.51 percent until 2006, depending on whether the reduction rule was applicable. Tax rates for small-firm owners and small individual fortunes were substantially lower, but the tax difference was much smaller when owners of large fortunes could benefit from the reduction rules. The effective wealth tax was much greater if firm owners had to finance wealth tax payments through additional dividend payouts. In such cases the effective total wealth taxes were affected by high marginal income tax rates and peaked at extremely high levels in the 1970s and 1980s. Towards the end of the wealth tax regime, aggregate wealth tax revenues were relatively small: it never exceeded 0.4 percent of GDP in the postwar period and amounted to 0.16 percent of GDP in 2006.
    Keywords: Wealth tax; Tax avoidance; Entrepreneurship
    JEL: D31 H20 K34
    Date: 2014–01–02
  5. By: Ben Lockwood (CBT, CEPR and Department of Economics, University of Warwick)
    Abstract: This paper considers the optimal taxation of savings intermediation services in a dynamic general equilibrium setting, when the government can also use consumption, income and profit taxes. When 100% taxation of profit is available, taxes on services supplied to firms should be deductible from profit, implying the optimality of a VAT-type tax. As for the rate of tax, in the steady state, an optimal arrangement is to set it equal to the rate of tax on capital income, not consumption. In turn, the capital income tax is zero when the when an unrestricted profit tax is available, but in the more realistic case when such a tax is not available, this rate can be positive or negative, but generally different to the optimal rate of tax on consumption.
    Keywords: financial intermediation services, tax design, banks, payment services
    JEL: G21 H21 H25
    Date: 2013
  6. By: Martin Ruf (Eberhard Karls Universität Tübingen); Alfons J. Weichenrieder (Goethe Universität Frankfurt)
    Abstract: In its Cadbury-Schweppes decision of 12 September 2006 (C-196/04), the ECJ decided that the UK CFC rules, which were implemented to subject low taxed passive income of foreign affiliates to UK corporate tax, implied an infringement of the freedom of establishment. Consequently, many EU countries including Germany changed their legislation. The paper discusses to which extent the ECJ ruling has impacted on the allocation of passive assets in German multinationals. Using firm level data we find evidence for an increased preference for low-tax European countries compared to non-European countries.
    Keywords: European Court of Justice, corporation tax, foreign direct investment, CFC regulation, passive investment
    JEL: H25 H73
    Date: 2013
  7. By: Jarkko Harju (Government Institute for Economic Research, Finland); Tuomas Matikka (Government Institute for Economic Research, Finland)
    Abstract: Previous literature shows that income taxation especially affects the behaviour of business owners and entrepreneurs. However, it is still unclear how much of the response is due to changes in effort and other real economic activity, and how much is due to tax avoidance and tax evasion. This is important because the nature of the response largely affects the welfare implications and policy recommendations. In this paper we distinguish between real responses and tax-motivated income- shifting between tax bases using the widely-applied elasticity of taxable income (ETI) framework. We use extensive register-based panel data on both the owner and firm-level, which enable us to carefully distinguish between real effects and income-shifting among the owners of privately held corporations in Finland. Our results show that income-shifting accounts for over two thirds of the overall ETI. As the shifted income is also taxed, this significantly decreases the marginal excess burden of income taxation compared to the standard model in which the overall ETI defines the welfare loss. However, in addition to income-shifting effects, we find that dividend taxation significantly affects the real behaviour of the owners.
    Keywords: Personal income taxation, Elasticity of taxable income, Business owners, Tax avoidance
    JEL: H24 H25 H32
    Date: 2013
  8. By: Anne Brockmeyer (London School of Economics)
    Abstract: This paper exploits bunching of firms at a tax kink as quasi-experimental variation to identify the effect of a tax rate change on investment, and explore how this effect interacts with variation in capital depreciation rates. The idea is that firms with a taxable income slightly above the kink have an incentive to reduce their income to bunch at the kink, and increasing investment is one possible strategy for that. This means that bunching of firms should be accompanied by a spike in investment at the kink. Building on the standard bunching framework, I estimate the frequency distribution of firms around the kink, and the share of bunchers with excess investments at the extensive and intensive margin. I apply this approach to administrative tax return data for the universe of UK firms from 2001-2007, and show that investment by small firms significantly responds to a tax rate change. I find large and significant spikes in the share of capital investors and median capital costs at the 10k kink. The spikes are larger in 2002-2005 when the kink is larger, and for quickly depreciating capital items, which yield larger tax reductions. I estimate that extensive margin investments explain 7.7-19.2% of bunching and intensive margin investments explain 4.3-16.8% of bunching. Evidence from subsample analysis supports the interpretation of the observed behaviour as real investment rather than evasion or avoidance.
    Keywords: Corporate taxation
    JEL: H25
    Date: 2013
  9. By: Jennifer Blouin (University of Pennsylvania); Harry Huizinga (Tilburg University and CEPR); Luc Laeven (International Monetary Fund and CEPR); Gaëtan Nicodème (European Commission, ULB, CESifo and CEPR)
    Abstract: This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential data on the (internal) leverage of foreign affiliates of US multinationals, we find that thin capitalization rules affect multinational firm capital structure in a significant way. Specifically, restrictions on an affiliate’s ratio of overall debt to assets reduce this ratio on average by 1.9%, while restrictions on the ratio of an affiliate’s borrowing from the parent company to its equity reduce this ratio by 5.7%. Also, restrictions on borrowing from the parent reduce the overall debt to assets ratio of the affiliate by 3.5%, which shows that rules targeting internal debt have an indirect effect on the overall indebtedness of affiliate firms. Thin capitalization rules mitigate the traditional effect of corporate taxation on affiliate debt, while their impact on affiliate leverage is higher if their application is automatic rather than discretionary. Finally, we exploit variation over time in thin capitalization rules to show that the first year impact of new capitalization rules on affiliate leverage is significant albeit less than its long-term effect. Overall, our results show than thin capitalization rules, which thus far have been understudied, have a substantial effect on capital structure within multinational firms.
    Keywords: Thin capitalization rule; Multinational firm; Capital structure; Taxation
    JEL: G32 H25
    Date: 2013

This nep-acc issue is ©2014 by Alexander Harin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.