nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2023‒03‒20
nine papers chosen by

  1. Balance sheet smoothing By Tobias Witter; Thorsten Sellhorn; Jens Müller; Vicky Kiosse
  2. Corporate Taxes and Economic Inequality: A Credit Channel By Delis, Manthos; Galariotis, Emilios; Iosifidi, Maria
  3. Опростяване и усъвършенстване By Fabio Ashtar Telarico
  4. What drives Bank Income Smoothing? Evidence from Africa By Ozili, Peterson K
  5. Effect of Tax Cut on Investment: Evidence from Indian Manufacturing firms. By Hussain, Adam
  6. How Do the Owners Hide their Real Profits By Junejo, Arif Iqbal
  7. A Strategic Tax Mechanism By Giorgos Stamatopoulos
  8. Does IFRS 9 increase banks’ resilience? By Kund, Arndt-Gerrit; Rugilo, Daniel
  9. Off-Balance Sheet Activities and Scope Economies in U.S. Banking By Jingfang Zhang; Emir Malikov

  1. By: Tobias Witter; Thorsten Sellhorn; Jens Müller; Vicky Kiosse
    Abstract: We investigate how managers smooth volatility in balance sheets, using the pension accounting change IAS 19R as a shock to balance sheet volatility. This shock increases pension plans’ funding transparency, which is the source of volatility, without targeting actual plan funding. We find that managers adjust funding levels, pension asset allocation and assumptions to mitigate volatility at this source, but also plan settlements increase drastically. The volatility of accruals decreases, whereas volatility of discretionary real decisions increases pointing to managerial decisions to alleviate volatility in balance sheets. The exposure to balance sheet volatility and the relative net costs of related smoothing are cross-sectional predictors of smoothing activities. Overall, we provide evidence consistent with a vast body of pension accounting literature mentioning but not explicitly investigating the transmission of pension plan volatility on firms’ balance sheets. Our findings link this literature with studies on balance sheet management and provide a new angle on the effects of a transparency mandate in (pension) accounting on managerial decision-making.
    Keywords: balance sheet volatility, balance sheet smoothing, real effects, defined benefit plans, IAS 19R
    JEL: G11 G31 G32 M41
    Date: 2022–12–13
  2. By: Delis, Manthos; Galariotis, Emilios; Iosifidi, Maria
    Abstract: Corporate taxation can have redistributive effects on income and wealth. We hypothesize and empirically establish such an effect working via bank credit. Using a unique sample of majority-owned firms that apply for credit, we show that after a decrease in corporate tax rates the relative-ly poor get easier access to credit. However, this policy also considerably increases loan amounts and decreases loan spreads for the relatively rich. Ultimately, reducing the corporate tax rate pre-dominantly increases the future income and wealth of relatively rich business owners.
    Keywords: Corporate taxes; Economic inequality; Bank credit; Credit score
    JEL: D63 G20 G21 H25
    Date: 2023–02–19
  3. By: Fabio Ashtar Telarico (University of Ljubljana)
    Abstract: В продължение на 30 години след края на реалния социализъм България премина от доста радикално "различна" данъчна система към плоска данъчна ставка с пределни данъчни ставки, които спаднаха от 40 % до 10 % както за корпоративния данък, така и за данъка върху доходите на физическите лица. От съществено значение е, че иконометричните модели за прогнозиране, използвани от българското Министерство на финансите, сочат увеличение на данъчните приходи, съвместимо с така наречената "крива на Лафер". Също така много икономисти бяха на мнение, че приходите щяха да се увеличат. Реалността обаче не отговори на очакванията, основани на прогнозните модели и залегнали в основната икономическа теория. Ето защо в настоящата статия се поставя въпросът дали съществуват по-ефективни модели за прогнозиране на приходите от данъци върху доходите на физическите лица и корпоративните данъци в България, които са лесно приложими и превъзхождат сега използваните. След като формулира конструктивна критика на настоящите модели за прогнозиране, статията предлага лесно приложими, прозрачни алтернативи и доказва тяхното превъзходство.
    Abstract: In the thirty years since the end of real socialism, Bulgaria's went from having a rather radically 'different' tax system to adopting flat-rate taxation with marginal tax rates that fell from figures as high as 40% to 10% for both the corporate-income tax and the personal-income tax. Crucially, the econometric forecasting models in use at the Bulgarian Ministry of Finance hinted at an increase in tax revenue compatible with the so-called 'Laffer curve'. Similarly, many economists held the view that revenues would have increased. However, reality fell short of those expectations based on forecasting models and rooted in mainstream economic theory. Thus, this paper asks whether there are betterperforming forecasting models for personal-and corporate-income tax-revenues in Bulgaria that are readily implementable and overperform the ones currently in use. After articulating a constructive critique of the current forecasting models, the paper offers readily implementable, transparent alternatives and proves their superiority.
    Abstract: Au cours des trente années qui se sont écoulées depuis la fin du socialisme réel, la Bulgarie est passée d'un système fiscal assez radicalement "différent" à l'adoption d'une imposition forfaitaire, avec des taux d'imposition marginaux qui sont passés de 40 % à 10 %, tant pour l'impôt sur les sociétés que pour l'impôt sur le revenu des personnes physiques. Les modèles économétriques de prévision utilisés par le ministère bulgare des finances laissaient entrevoir une augmentation des recettes fiscales compatible avec la "courbe de Laffer". De même, de nombreux économistes étaient d'avis que les recettes auraient augmenté. Cependant, la réalité n'a pas répondu aux attentes fondées sur les modèles de prévision et ancrées dans la théorie économique dominante. Cet article pose donc la question de savoir s'il existe des modèles de prévision plus performants pour les recettes fiscales des particuliers et des entreprises en Bulgarie, qui soient facilement applicables et plus performants que ceux actuellement utilisés. Après avoir formulé une critique constructive des modèles de prévision actuels, l'article propose des alternatives transparentes et faciles à mettre en œuvre et prouve leur supériorité.
    Abstract: Nei trent'anni trascorsi dalla fine del socialismo reale, la Bulgaria è passata da un sistema fiscale radicalmente "diverso" all'adozione di una tassazione forfettaria con aliquote marginali che sono scese dal 40% al 10% sia per l'imposta sul reddito delle società che per quella sul reddito delle persone fisiche. In particolare, i modelli econometrici di previsione in uso presso il Ministero delle Finanze bulgaro indicavano un aumento del gettito fiscale compatibile con la cosiddetta "curva di Laffer". Allo stesso modo, molti economisti ritenevano che le entrate sarebbero aumentate. Tuttavia, la realtà è stata inferiore alle aspettative basate sui modelli di previsione e radicate nella teoria economica tradizionale. Il presente documento si chiede quindi se esistano modelli di previsione più efficaci per le entrate fiscali delle persone fisiche e delle società in Bulgaria, facilmente implementabili e superiori a quelli attualmente in uso. Dopo aver formulato una critica costruttiva agli attuali modelli di previsione, il documento offre alternative trasparenti e facilmente implementabili e ne dimostra la superiorità.
    Keywords: данъчни приходи, прогнозиране на приходи, България, иконометрично моделиране, tax revenues, revenue forecasting, Bulgaria, econometric modelling, recettes fiscales, prévision des recettes, Bulgarie, modélisation économétrique, gettito fiscale, previsione del gettito, modelli econometrici
    Date: 2023–02–13
  4. By: Ozili, Peterson K
    Abstract: We investigate whether banks use loan loss provisions to smooth income and whether this behaviour is influenced by foreign bank presence, ownership and institutional quality differences across African countries. We examine 370 banks from 21 African countries from 2002 to 2021. We find evidence that African banks use LLPs to smooth their income when they are more profitable during economic boom or recession. Income smoothing is persistent (i) among banks with a widely dispersed ownership, (ii) among banks with strong government ownership and (iii) among banks with weak government ownership. Income smoothing is also persistent in African countries that have greater corruption control, better regulatory quality and political stability. In contrast, moderate concentrated ownership reduces bank income smoothing. Bank income smoothing is reduced in African countries that have strong rule of law, high government effectiveness, strong foreign bank presence and strong voice and accountability institutions. The implication is that effective corporate governance and institutional quality can constrain the extent of income smoothing by African banks.
    Keywords: Ownership concentration, foreign banks, income smoothing, loan loss provisions, Africa, institutional quality, banks, positive accounting theory, corporate governance.
    JEL: M40 M41 M42
    Date: 2023
  5. By: Hussain, Adam (National Institute of Public Finance and Policy)
    Abstract: Does a reduction in the corporate income tax rate trigger investments in developing countries? This paper answers this question in a difference in differences framework. Using firm-level data on Indian manufacturing firms. I study the effect of the 2019 and 2020 Indian tax reform that reduced the corporate income tax rate for domestic firms by 5%. I find that the reduction in corporate income tax led to a significant increase in the investments of domestic firms. The magnitude of the effect is found to be stronger for large domestic firms than the smaller ones. These results imply that the corporate income tax cuts can increase investment in developing countries and large domestic firms benefit more than small firms from a tax cut.
    Keywords: Investment ; Corporate tax ; Indian manufacturing firms
    JEL: G31 H25 H71
    Date: 2023–02
  6. By: Junejo, Arif Iqbal
    Abstract: This report aims at the analyzing the impacts different illegal activities in the textile sector of the Karachi, Pakistan. In Pakistan including Karachi there are several issues those arises when textile business owners hide their real profits to save taxation. The issues like smuggling, money laundering, financial frauds in the companies, frauds in paying taxes etc. currently this issue has been under consideration that the CBR has reduced the sales tax rate to the zero percentage. So the business owners of the textile companies want that the previous sales tax which was imposed on them should also be reduced to zero.
    Keywords: Profits
    JEL: G0 G00
    Date: 2022–12–15
  7. By: Giorgos Stamatopoulos (Department of Economics, University of Crete, Greece)
    Abstract: We analyze a novel tax mechanism in imperfectly competitive markets. The government announces an excise tax rate and auctions-off a number of tax exemptions. Namely, it invites the firms in a market to acquire the right to be exempted from the excise tax. The highest bidders are exempted by paying their bids; and all other firms remain subject to it.
    Keywords: commodity tax; tax exemption; auction; entry
    JEL: H25 L13
    Date: 2023–02–02
  8. By: Kund, Arndt-Gerrit; Rugilo, Daniel
    Abstract: IFRS 9 substantially affects the financial sector by changing the impairment methodology for credit losses. This paper analyzes the implications of the change from IAS 39 to IFRS 9 in the context of bank resilience. We shed light on two effects. First, the “cliff-effect”, which refers to sudden increases in impairments. It occurred under IAS 39, as credit losses were only recognized with hindsight, and thus late and abruptly. IFRS 9 was designed to mitigate this issue through a staging approach, which gradually recognizes expected credit losses (ECL). These anticipated impairments, however, constitute a significant “front-loading”, which is the second effect we investigate. The earlier recognition of losses may adversely impact bank resilience through lower capital levels. In the absence of archival data of IFRS 9 and their potential biases due to the COVID-19 pandemic, we use the European bank stress test results as a natural experiment, in which all banks are subject to the same regulations and exogenous shocks. This characteristic allows us to isolate otherwise immeasurable effects and empirically investigate, whether the conjunction of both effects constitutes a net benefit to banks’ resilience. Furthermore, the vigorousness of procyclicality under IFRS 9 can be compared to IAS 39 by contrasting a hypothetical baseline and an adverse scenario. JEL Classification: E58, G21, G28, M41, M48
    Keywords: Bank stress test, CET1, impairment, procyclicality
    Date: 2023–03
  9. By: Jingfang Zhang; Emir Malikov
    Abstract: Propelled by the recent financial product innovations involving derivatives, securitization and mortgages, commercial banks are becoming more complex, branching out into many "nontraditional" banking operations beyond issuance of loans. This broadening of operational scope in a pursuit of revenue diversification may be beneficial if banks exhibit scope economies. The existing (two-decade-old) empirical evidence lends no support for such product-scope-driven cost economies in banking, but it is greatly outdated and, surprisingly, there has been little (if any) research on this subject despite the drastic transformations that the U.S. banking industry has undergone over the past two decades in the wake of technological advancements and regulatory changes. Commercial banks have significantly shifted towards nontraditional operations, making the portfolio of products offered by present-day banks very different from that two decades ago. In this paper, we provide new and more robust evidence about scope economies in U.S. commercial banking. We improve upon the prior literature not only by analyzing the most recent data and accounting for bank's nontraditional off-balance sheet operations, but also in multiple methodological ways. To test for scope economies, we estimate a flexible time-varying-coefficient panel-data quantile regression model which accommodates three-way heterogeneity across banks. Our results provide strong evidence in support of significantly positive scope economies across banks of virtually all sizes. Contrary to earlier studies, we find no empirical corroboration for scope diseconomies.
    Date: 2023–02

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