nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2014‒11‒07
seven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Do Actions Speak Louder Than Words? Auditing, Disclosure, and Verification in Organizations By Luca Anderlini; Dino Gerardi; Roger Lagunoff
  2. Are Hotel Property Taxes Fully Passed on to Hotel Guests? By James Mak
  3. Personal Income Tax Reforms and the Elasticity of Reported Income to Marginal Tax Rates: An Empirical Analysis Applied to Spain By Arrazola, María; de Hevia, José; Romero, Desiderio; Sanz-Sanz, José Félix
  4. Estructura impositiva y capacidad recaudatoria en España: Un análisis comparado con la UE By Pablo Hernández de Cos; David López Rodríguez
  5. Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading- By Andrew Ellul; Chotibhak Jotikasthira; Christian T. Lundblad; Yihui Wang
  6. Tax Compliance Social Norms and Institutional Quality: An Evolutionary Theory of Public Good Provision By Panayiotis Nicolaides
  7. Financial frictions and the reaction of stock prices to monetary policy shocks By Ozdagli, Ali K.

  1. By: Luca Anderlini (Department of Economics, Georgetown University); Dino Gerardi (Collegio Carlo Alberto, Universit' degli Studi di Torino); Roger Lagunoff (Department of Economics, Georgetown University)
    Abstract: We study the relative performance of disclosure and auditing in organizations. We consider the information transmission problem between two decision makers who take actions at dates 1 and 2 respectively. The first decision maker has private information about a state of nature that is relevant for both decisions, and sends a cheap-talk message to the second. The second decision maker can commit to only observe the message (disclosure), or can retain the option to observe the action of the first decision maker (auditing) or, at some cost, to verify the state. In equilibrium, state verification will never occur and the second decision maker effectively chooses between auditing and disclosure. When the misalignment is preferences reflects a bias in a decision maker's own action relative to that of the other - we call this an agency bias - then, in equilibrium, the second decision maker chooses to audit. Actions speak louder than words in this case. When one decision maker prefers all actions to be biased relative to the other decision maker - we call this an ideological bias - then, if the misalignment is large enough, in equilibrium the second decision maker chooses disclosure. In this case words speak louder than actions. While firms are usually characterized by agency bias, ideological bias is more common in political systems. Our results indicate that the ability to commit not to audit has value in the latter case. However such commitment is rarely feasible in the political sphere.
    Keywords: Auditing, Disclosure, Agency Bias, Ideological Bias
    JEL: C73 D63 D72 D74 H11
    Date: 2014–06–01
  2. By: James Mak (UHERO, University of Hawaii at Manoa)
    Abstract: Recent research on the excise tax effects of the property tax in small, multi-sector open economies suggests that the property tax may not be fully forward shifted to consumers as previously believed. I adapt this analysis to examine whether local hotel property taxes in Hawaii are fully passed on to hotel guests as lawmakers had intended. We conclude that full forward shifting is unlikely. I argue that an excise/sales tax on hotel occupancy is preferable to the property tax as a tourist tax.
    Keywords: Property tax, excise tax effects, hotel occupancy tax, hotel property tax
    Date: 2013–12
  3. By: Arrazola, María; de Hevia, José; Romero, Desiderio; Sanz-Sanz, José Félix
    Abstract: This paper shows the utility of the elasticity of reported income to assess tax reforms in detail from the perspectives of tax revenue and well-being. We provide evidence of the value of the elasticity of reported income in Spain given the variations in marginal rates of the Personal Income Tax. The mean value of this parameter for the entire Spanish territory is 1,541. Nevertheless, we confirm the existence of considerable heterogeneity in the value of this elasticity depending on taxpayers’ characteristics. Based on these estimated elasticities, we make a detailed assessment of the impact of the recent increase in marginal tax rates that Spain approved in 2012.
    Keywords: Personal income tax, Taxable income elasticity, Excess burden, Tax inefficiency,
    Date: 2014
  4. By: Pablo Hernández de Cos (Banco de España); David López Rodríguez (Banco de España)
    Abstract: This paper describes the revenue-raising capacity and structure of the Spanish tax system, in comparison with the economies of the European Union. Spain stands out for the low weight of its tax revenues in GDP relative to the EU27 average. This lower weight of tax revenue is mainly a consequence of indirect taxes (VAT, excise duties and environmental taxes). In fact, Spain has the lowest weight of consumption taxation in the European Union. As regards labour taxation, revenue raised as a proportion of GDP is similar to the EU27 average, although the weight of social security contributions in GDP, in particular those charged to employers, is higher. Spain also raises relatively more revenue from the taxation of capital, in particular from the taxation of wealth.
    Keywords: fiscal pressure, tax structure, taxation in the EU.
    JEL: H20 E62 H23 H24 H25
    Date: 2014–10
  5. By: Andrew Ellul (Indiana University); Chotibhak Jotikasthira (University of North Carolina); Christian T. Lundblad (University of North Carolina); Yihui Wang (Fordham University)
    Abstract: We provide new empirical evidence concerning the contentious debate over the use of historical cost (HCA) versus mark-to-market (MTM) accounting in regulating financial institutions. These accounting rules, through their interactions with capital regulations, alter financial institutions’ trading behavior. The insurance industry provides a natural laboratory to explore these interactions since significant differences exist in regulatory accounting rules: (1) life insurers have greater flexibility to hold speculative-grade assets under HCA than property and casualty insurers, which are required to use MTM, and (2) the degree to which life insurers have to recognize market value through impairment differs across U.S. states. In the context of the sizeable downgrades of asset-backed securities (ABS) during the 2007-2009 financial crisis, we show that insurers facing MTM are more likely to sell the downgraded ABS than insurers holding these assets under HCA. To improve their capital positions, insurers facing HCA disproportionately resort to gains trading, selectively selling their corporate and government bond holdings with the highest unrealized gains. This trading behavior transmits shocks across otherwise unrelated markets.
    Keywords: Regulation; Mark to market; Historical cost accounting; Gains trading; Fire sales; Asset-backed securities (ABS); Corporate bonds; Insurance companies.
    JEL: G11 G12 G14 G18 G22
    Date: 2014–10–14
  6. By: Panayiotis Nicolaides
    Abstract: This paper presents an evolutionary theory of public good provision. The framework analyses the relationship between endogenous tax compliance norms, formed by the interactions of rationally-bounded individuals in a network, and the quality of institutions that collect taxes and distribute the public good to the individuals. Conditions for the level of public good utility are derived and illustrated on the "Public Good Provision Hypersurface"; a two-dimensional manifold that describes the relationship between norms, institutional quality and public good provision. I show that the effectiveness of the government to collect taxes increases the determinacy of public good provision but does not ensure its maximisation, which depends also on the level of wasteful government expenditure. If the government is ineffective in performing audits, the welfare from public good provision becomes subject to social norms. Lastly, a condition is derived at which social norms of tax compliance can act as a substitute for enforcement and can result in the maximisation of public good utility.
    Keywords: Taxation; Tax compliance; Social norms Public goods, Government waste
    JEL: H26 H41 C73
    Date: 2014–10
  7. By: Ozdagli, Ali K. (Federal Reserve Bank of Boston)
    Abstract: This paper reveals and tests a new theoretical implication of the credit channel of monetary policy: as financial frictions (monitoring or auditing costs) increase, the reaction of stock prices to monetary policy shocks decreases. Correspondingly, towards the end of the Enron accounting scandal, the stock prices of firms sharing the same auditor as Enron responded by about 50 to 60 basis points less than other firms to a 10 basis point reduction in the federal funds target rate. This effect is particularly strong among more opaque firms for which financial statements likely provide a more important monitoring tool.
    Keywords: financial constraints; stock market; credit channel; monetary policy
    JEL: E44 E52 G12 G32
    Date: 2014–07–29

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.