nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2015‒12‒20
eleven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Loan Loss Provisioning, Income Smoothing, Signaling, Capital Management and Procyclicality: Does IFRS Matter? Empirical Evidence from Nigeria By Ozili, Peterson K
  2. Economic Integration, Corporate Tax Incidence and Fiscal Compensation By Nelly Exbrayat; Benny Geys
  3. Implication of Recent Federal Personal Income Tax Increases for Income Tax Evasion, Tax Revenues, and Budget Deficits By Boylan, Robert; Cebula, Richard; Foley, Maggie; Izard, Douglass
  4. Tax competition in Europe: Europe in competition with other world regions? By Streif, Frank
  5. Designing a corporate bond index on solvency criteria By Lauren Stagnol
  6. Accounting Information Quality and Government Guaranteed Loans: Evidence from Japanese SMEs By Hyonok KIM; YASUDA Yukihiro
  7. Looking for a success in the euro crisis adjustment programs: the case of Portugal By Reis, Ricardo
  8. Capitalization of capital gains taxes: (In)attention and turn-of-the-year returns By Sebastian Eichfelder; Mona Lau
  9. Formula apportionment or separate accounting? Tax-induced distortions of multinationals' locational investment decisions By Ortmann, Regina; Pummerer, Erich
  10. The Incidence of Financial Transactions Taxes By Dean Baker; Nicole Woo
  11. Adjusting fiscal balances for the business cycle: New tax and expenditure elasticity estimates for OECD countries By Robert W.R. Price; Thai-Thanh Dang; Jarmila Botev

  1. By: Ozili, Peterson K
    Abstract: Prior research show that banks have various motivations for influencing loan loss provisions. This study examines these motivations and the behaviour of loan loss provision in relation to the business cycle. After controlling for the impact of Basel regulation on LLP, I find strong evidence for income smoothing, capital management and procyclical LLP behaviour during the voluntary, not mandatory, adoption of IFRS in Nigeria. I find evidence of signaling only after including interaction terms in the model. Additionally, I find that (i) banks increase loan loss provisioning after the implementation of Basel; (ii) banks have some incentive to signal via LLP in the post-IFRS period relative to the pre-IFRS period (iii) banks have joint motivations to manipulate LLP and may face trade-offs in the choice of managing regulatory capital or smoothing income in the post-IFRS period. Overall, I conclude that IFRS reinforces LLP motivations and procyclical patterns. The findings of this paper are relevant to current concerns of accounting standard setters and bank regulators on the current model of loan loss provisioning as well as the on-going debate on the mandatory implementation of IFRS in Nigeria.
    Keywords: Loan loss provision, Earnings Management, Smoothing, Signaling, Bank Capital, Procyclicality, Nigeria
    JEL: G21 G23 O55
    Date: 2015
  2. By: Nelly Exbrayat (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Benny Geys (BI Norwegian School of Management - BI Norwegian School of Management)
    Abstract: Higher corporate taxes are often argued to depress wages (a tax incidence effect), while higher wages may require compensation via lower corporate tax rates (a fiscal compensation effect). Yet, existing empirical evidence ignores that i) both effects are likely to occur simultaneously (necessitating a joint estimation approach), and ii) capital mobility might play a critical moderating role for the strength of both effects. Using a panel dataset comprising 24 OECD countries over the period 1982-2007, we address both these deficiencies. This clearly illustrates the simultaneous existence of tax incidence and fiscal compensation effects. Moreover, capital mobility (and the ensuing relative bargaining power of economic agents) has a significant influence on both the prevalence and strength of these effects.
    Keywords: Wage bargaining, Corporate taxation, Fiscal Compensation,Tax Incidence, Capital mobility
    Date: 2015
  3. By: Boylan, Robert; Cebula, Richard; Foley, Maggie; Izard, Douglass
    Abstract: In this study, we present evidence which strongly suggests that personal income tax evasion has been an increasing function of the maximum marginal federal personal income tax rate over the period 1970-2008, which constitutes the most current data currently available on aggregate personal income tax evasion. This evidence leads us to conclude that the federal personal income tax increases implemented effectively in 2013 under provisions of American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act of 2010 will result in increased tax avoidance behavior. Among other things, this public-policy-induced increase in personal income tax evasion implies that the federal budget deficits in coming years will be greater than projected by the CBO and various government agencies. We also find that tax avoidance activity is an increasing function of the unemployment rate, the interest rate yield on three year Treasury Notes, and per capita real GDP (adopted as a measure of per capita real income), and a decreasing function of the Tax Reform Act of 1986 (during its first two years of being implemented), the IRS audit rate, and the ratio of the tax free interest rate yield on high grade municipals to the interest rate yield on ten year Treasury Notes. Thus, there is also evidence that persistently high unemployment rates may increase tax evasion and the size of federal budget deficits, although increasing the audit rate by IRS personnel may raise tax compliance to some extent.
    Keywords: underground economy, tax evasion, tax rate increases, tax revenues, budget deficit
    JEL: H24 H26 M42
    Date: 2014–07–12
  4. By: Streif, Frank
    Abstract: Corporate tax levels have fallen substantially in Europe during the last decades. A broad literature has identified tax competition as one reason for this decline in corporate tax levels. However, none of these studies explicitly asks the question whether tax competition within regions is different from tax competition across regions, e.g. due to global regionalism of foreign direct investments. This is a crucial question to answer in order to discuss the desirability of tax harmonization in a distinct region, for example, within the European Union. Therefore, the study aims to give hints on the question whether the decline in corporate tax levels in Europe is mainly driven by tax competition between EU member states or by pressure from other world regions. The results of this study, which makes use of tax reaction functions, indicate that there is evidence for tax competition within Europe, whereas there is no robust evidence that European countries compete with countries from other world regions.
    Keywords: corporate taxes,tax competition,tax harmonization,Europe
    JEL: H2 H77 H87
    Date: 2015
  5. By: Lauren Stagnol
    Abstract: Doubts are rising whether bond indices, in the way they are constructed, are effective in their role of representing the markets they are designed for. Since index constituents are defined on market shares –the larger the debt obligation, the larger the share in the index– it may be that certain risks related to a high level of indebtedness are being accentuated and not necessarily representative of the market as a whole. Undue debt levels would in theory not arise in an information-efficient market, however, if prices are distorted, it makes sense to compensate for that and add elementary information on the debt issuers to the index construction process. We test how that works out on corporate bonds. We build a bond index that is based on firm accounting data rather than debt market value, and give evidence that it may serve as a market proxy.
    Keywords: fundamental indexing, alternative corporate bond index, solvency criteria, market efficiency.
    JEL: G10 G11 G14
    Date: 2015
  6. By: Hyonok KIM; YASUDA Yukihiro
    Abstract: We empirically investigate the effects of accounting information quality, as measured by accruals quality, on the use of government guaranteed loans, which we regard as a form of transaction lending. We find that higher accruals quality is associated with higher use rates of government guaranteed loans, but not associated with use rates of nonguaranteed (i.e., regular) loans, which we consider to constitute relationship lending within the Japanese context. We also find that higher accruals quality is not related to the interest rate for guaranteed loans, but is associated with a lower interest rate for nonguaranteed loans. These results indicate that the relevant accounting information is effectively used in the screening processes for small and medium-sized enterprises (SMEs), but that the effectiveness varies depending on the particular lending technology employed.
    Date: 2015–12
  7. By: Reis, Ricardo
    Abstract: Portugal’s adjustment program in 2010-14 under the troika was extensive and aimed at addressing its large debt and anemic growth, so it may serve as a blueprint for reforms in the Eurozone. This paper argues that, conditional on a diagnosis of the underlying problems of the Portuguese economy, the adjustment program failed to deliver in definitely addressing the problems in public finances, but succeeded in leaving promising signs of reform in the structure of the economy. In particular, on the negative side, public debt is still high, primary surpluses improved modestly, and public spending barely fell as the problem of ever-rising pension payments remained unsolved. On the positive side, unemployment fell sharply, exports and the current account balance rose, capital and labor reallocated to more productive and tradable sectors, and the country is growing faster than the EU for the first time in 15 years.
    Keywords: fiscal austerity; fiscal consolidation; structural reforms
    JEL: E65 F44 H63 O52
    Date: 2015–12
  8. By: Sebastian Eichfelder (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Mona Lau (Faculty of Economics and Management, Freie Universität Berlin and Ernst & Young Berlin)
    Abstract: We argue that the tax capitalization effect is a function of the attention of market participants. Market reactions can therefore be driven not only by the announcement dates of tax events but also by factors influencing the dissemination of tax information, such as deadlines and media reports. Analyzing the introduction date of the earlier-announced German capital gains tax reform of 2009 by triple-difference estimation, we find evidence of a delayed market reaction long after the announcement date. Within the last two (five) trading days before the deadline, we observe a sharp increase in abnormal trading volumes of 151.7% (104.0%). The aggregate abnormal return of the German capital market in the last five trading days in 2008 was 10.6%. Furthermore, we find a significant and positive correlation between trading volumes and measures for awareness of the upcoming tax reform (Google searches and media reports).
    Keywords: Capital gains tax, asset pricing, tax awareness, tax arbitrage, turn-of-the-year effect, market efficiency
    JEL: G02 G12 H24 M41
    Date: 2015–12
  9. By: Ortmann, Regina; Pummerer, Erich
    Abstract: We examine which tax allocation system leads to more severe distortions with respect to locational investment decisions. We consider separate accounting (SA) and formula apportionment (FA). The effects of both systems have been hotly debated in Europe in the past years. The reason is that the EU Member States are striving to implement a common European tax system that would lead to a switch from SA to FA. While existing studies focus primarily on the impact of taxes on locational decisions under either SA or FA, the main innovation of this paper is that it compares both systems with regard to the level of distortions they induce. We compare the optimal pre-tax investment decision with the optimal after-tax investment decision and infer from the difference in the allocation of investment funds which tax allocation system causes more severe distortions. We assume that the multinational group (MNG) has comprehensive book income shifting opportunities under SA. We find that the investment incentives under SA are opposed to those under FA for a profitable investment project. Whereas under SA as much as possible should be invested in a high-tax country, under FA as much as possible should be invested in a low-tax country. The distortions of locational investment decisions tend to be more severe under SA than under FA if a greater share of investment funds is to be invested in a low-tax country from a pre-tax perspective and the investment is profitable. Vice versa, locational decisions may be more distorted under FA if the optimal pre-tax investment decision requires investing a major share of funds in the high-tax country. In contrast to the often stated insensitivity of FA towards income shifting, we find the introduction of a tax allocation system based on FA in Europe could lead to a severe shift of economic substance to low-tax countries. The results of this paper are of particular interest for European policy makers and MNGs as our findings may induce European MNGs to reassess their recent locational investment decisions in the face of a potential future change in the applied tax allocation system.
    Date: 2015
  10. By: Dean Baker; Nicole Woo
    Abstract: As financial transactions taxes (FTT) have moved to be part of the mainstream debate on tax policy, there has been increased attention to the incidence of such taxes. This is an important aspect to the debate, since the merits of the tax will depend to a substantial extent on who will end up bearing the burden.
    Keywords: financial transactions tax, incidence, wall street, stock market, elasticity
    JEL: G G2 G28
    Date: 2015–12
  11. By: Robert W.R. Price; Thai-Thanh Dang; Jarmila Botev
    Abstract: This paper re-estimates the elasticities of government revenue and expenditure items with respect to the output gap for OECD countries. These elasticities are used by the OECD to calculate cyclically adjusted fiscal balances. The study updates the earlier 2005 study using the most recent datasets and tax codes, the coverage being confined in this paper to 35 countries, the 34 OECD member states and Latvia. The same two-step methodology is retained: revenue and expenditure elasticities with respect to the output gap being defined as the product of, first, the elasticities of individual revenue and expenditure items with respect to their bases and, second, the elasticities of these bases with respect to the output gap. A number of refinements and methodological improvements are made relative to the 2005 study. The revisions to individual elasticities relative to the 2005 vintage are significant in a number of cases but do not follow a clear pattern across countries, except for the elasticities of corporate income tax revenue which are revised up in most cases.<P>Correction des soldes budgétaires en fonction des variations cycliques : Nouvelles estimations d'élasticités des impôts et des dépenses pour les pays de l'OCDE<BR>Cet article estime les élasticités des composantes de revenus et de dépenses des administrations publiques par rapport aux écarts de production pour les pays de l’OCDE. Ces élasticités sont utilisées par l’OCDE pour calculer les soldes financiers des administrations publiques corrigés du cycle économique. Cette étude est une mise à jour des travaux parus en 2005, elle utilise les données et les codes d’impôts les plus récentes , et couvre 35 pays, à savoir les 34 pays membres ainsi que la Lettonie. La méthode en deux étapes a été conservée : les élasticités par rapport aux écarts de production étant définies comme le produit , dans un premier temps, des élasticités des composantes individuelles de recettes et de dépenses par rapport à leurs assiettes , et dans un deuxième temps des élasticités de ces assiettes par rapport aux écarts de production. Des modifications et des améliorations méthodologiques ont été apportées depuis l’étude de 2005. Les révisions d’élasticités par rapport à la version de 2005 sont importantes dans certains cas mais ne suivent pas un schéma type pour tous les pays, à l’exception des élasticités des impôts sur les bénéfices des sociétés qui ont été révisées à la hausse dans la plupart des cas.
    Keywords: budget elasticity, fiscal surveillance, automatic stabilisers, cyclically adjusted, ajustement cyclique, stabilisateurs automatiques, élasticité budgétaire, surveillance fiscale
    JEL: E62 H30 H60
    Date: 2015–12–14

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