nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2020‒10‒26
five papers chosen by

  1. Mental Accounting, Loss Aversion, and Tax Evasion: Theory and Evidence By Sanjit Dhami; Hajimoladarvish
  2. Liquidity, Interbank Network Topology and Bank Capital By Aref Mahdavi Ardekani
  3. How Expected Inflation Distorts the Current Account and the Valuation Effect By Philip Sauré; Philipp Herkenhoff
  4. Risk assessment of projects with R&D using the risk measure VaR and ES By Minasyan, Vigen (Минасян, Виген)
  5. A Q-Theory of Banks By Juliane Begenau; Saki Bigio; Jeremy Majerovitz; Matias Vieyra

  1. By: Sanjit Dhami; Hajimoladarvish
    Abstract: The evidence shows source-dependent entitlement to income sources and individuals are reluctant to part with income they feel more entitled to, e.g., earned labor income. Taxpayers may also be more reluctant to part with tax payments (evade more) from income sources they feel more entitled to- a form of mental accounting. We embed two main hypotheses within a rigorous theoretical model based on prospect theory. From incomes sources they feel more entitled to, taxpayers experience (i) greater loss aversion from paying taxes, and (ii) lower moral costs of evasion. We confirm the predictions of our model through MTurk experiments. Evasion is increasing in the tax rate and decreasing in the audit penalty. Moral costs influence taxpayers decisions. Loss aversion, measured “directly” for the first time for each individual in an evasion experiment, reduces evasion, as predicted by our theory. Loss aversion, risk aversion, and their interaction, are critical determinants of evasion.
    Keywords: mental accounting, tax evasion, loss aversion, morality, prospect theory, risk-aversion
    JEL: C91 C92 D82 D91 G21
    Date: 2020
  2. By: Aref Mahdavi Ardekani (Centre d'Economie de la Sorbonne)
    Abstract: By applying the interbank network simulation, this paper examines whether the causal relationship between capital and liquidity is influenced by bank positions in the interbank network. While existing literature highlights the causal relationship that moves from liquidity to capital, the question of how interbank network characteristics affect this relationship remains unclear. Using a sample of commercial banks from 28 European countries, this paper suggests that bank's interconnectedness within interbank loan and deposit networks affects their decisions to set higher or lower regulatory capital ratios when facing higher iliquidity. This study provides support for the need to implement minimum liquidity ratios to complement capital ratios, as stressed by the Basel Committee on Banking Regulation and Supervision. This paper also highlights the need for regulatory authorities to consider the network characteristics of banks
    Keywords: Interbank network topology; Bank regulatory capital; Liquidity risk; Basel III
    JEL: G21 G28 L14
    Date: 2020–10
  3. By: Philip Sauré (Johannes Gutenberg University); Philipp Herkenhoff (Johannes Gutenberg University)
    Abstract: We show that the current account balance (CA) is systematically distorted by an inflation effect, which arises because income on foreignissued debt is recorded through nominal interest accruing in the currency of denomination. Since nominal interests include compensations for expected inflation, increases in the latter must impact the CA. Guided by the relevant international accounting rules, we impute the inflation effect for 50 economies between 1991 and 2017. When correcting for the inflation effect, the absolute value of yearly CAs drops by 0.13% of GDP on average. Over the full period, however, the impact is a sizable reduction of 22.85% of initial GDP for the average country (26.4% for the U.S.). As the flip-side of the CA distortions, the inflation effect contributes systematically to the well-known valuation effect of net foreign assets, of which about a twelfth is accounted for between 1991 and 2017 for the average country and well over half for the U.S.
    JEL: F30 F32
    Date: 2020–10–09
  4. By: Minasyan, Vigen (Минасян, Виген) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The preprint was prepared on the basis of research work carried out at the RANEPA under the President of the Russian Federation in 2019. This paper proposes a model for assessing the risks of projects of companies in which there is R&D (Research & Development) - research and development work (R&D), a set of measures that includes both scientific research and the production of prototypes and small-scale samples products prior to the launch of a new product or system into industrial production. In this work, a method for assessing the corresponding risks was developed using a modified VaR measure for this application. The constructed model makes it possible to assess the risks of projects with R&D using the risk measure VaR with all possible parameters present in the model. At the same time, the paper analyzes the level of influence of projects with R&D on the economy as a whole.
    Date: 2020–05
  5. By: Juliane Begenau; Saki Bigio; Jeremy Majerovitz; Matias Vieyra
    Abstract: We document five facts about banks: (1) market and book leverage diverged during the 2008 crisis, (2) Tobin's Q predicts future profitability, (3) neither book nor market leverage appears constrained, (4) banks maintain a market leverage target that is reached slowly, (5) pre-crisis, leverage was predominantly adjusted by liquidating assets. After the crisis, the adjustment shifted towards retaining earnings. We present a Q-theory where leverage notions differ because book accounting is slow to acknowledge loan losses. We estimate the model and show that it reproduces the facts. We examine counterfactuals: different accounting rules produce a novel policy tradeoff.
    JEL: G21 G32 G33
    Date: 2020–10

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