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on Accounting and Auditing |
| By: | Anantharaman, Divya; Chuk, Elizabeth; Kamath, Saipriya |
| Abstract: | Although operating income is a pervasively used performance metric, the FASB has never defined operating income. ASU 2017-07 moves toward defining operating income for the first time in the FASB’s history by specifying the inclusion and exclusion of certain income components in operating income. We examine the real effects of a mandated relocation of the income-smoothing mechanisms for defined benefit pensions from “above the line” to “below the line” of operating income. For over 30 years, the income-smoothing mechanisms from SFAS 87 (1985) have created financial reporting incentives for employers to invest in higher-risk pension assets. Consistent with ASU 2017-07 reducing the financial reporting incentives for risk-taking, we predict and find that a sample of US firms subject to this mandate reduces investment in riskier pension assets following the change, relative to a control sample of Canadian firms not subject to the change. In cross-sectional tests, we find that the reduction in risk-taking is more pronounced in (1) firms where the financial reporting benefits to risk-taking were stronger in the pre-period, and (2) firms where the regulatory change particularly reduced those financial reporting benefits. Our findings provide the first direct evidence that smoothing induces US pension sponsors to tilt toward riskier pension investments; they also indicate that financial statement presentation has real economic consequences. |
| Keywords: | accounting regulation; standard-setting; defined benefit pension; operating income; Accounting Standards Update No. 2017-07 |
| JEL: | M40 M41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:124405 |
| By: | Feinstein, Zachary; Hałaj, Grzegorz; Søjmark, Andreas |
| Abstract: | We build a balance sheet-based model to capture run risk, i.e., a reduced potential to raise capital from liquidity buffers under stress, driven by depositor scrutiny and further fuelled by fire sales in response to withdrawals. The setup is inspired by the Silicon Valley Bank (SVB) meltdown in March 2023 and our model may serve as a supervisory analysis tool to monitor build-up of balance sheet vulnerabilities. Specifically, we analyze which characteristics of the balance sheet are critical in order for banking system regulators to adequately assess run risk and resilience. By bringing a time series of SVB’s balance sheet data to our model, we are able to demonstrate how changes in the funding and respective asset composition made SVB prone to run risk, as they were increasingly relying on heldto-maturity, aka hidden-to-maturity, accounting standards, masking revaluation losses in securities portfolios. Finally, we formulate a tractable optimisation problem to address the designation of heldto-maturity assets and quantify banks’ ability to hold these assets without resorting to remarking. By calibrating this to SVB’s balance sheet data, we shed light on the bank’s funding risk and impliedrisk tolerance in the years 2020–22 leading up to its collapse. JEL Classification: C62, G21, G11 |
| Keywords: | accounting standards, bank runs, fire sales, funding risk |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242970 |
| By: | Georg U. Thunecke |
| Abstract: | This paper empirically investigates whether governments are substituting from corporate to consumption taxation due to tax competition using a novel self-collected data set of corporate and consumption tax regime information. I estimate the slope of the tax policy reaction function between corporate and consumption tax rates exploiting the cross-sectional interdependence of corporate tax rates for an instrumental variable approach. Additionally, I analyze the rate-revenue relationship of both tax instruments to evaluate the overall revenue implications of corporate tax competition. I find that, on average, a one percentage point decrease in the corporate tax rate leads to a 0.35 percentage point increase in the consumption tax rate. The rate-revenue relationship of both corporate and consumption tax rates follows an inverted U-shape. Furthermore, governments can fully compensate for revenue losses from tax competition by substituting to consumption taxation. These results indicate that the debate on corporate tax competition may overstate efficiency considerations and underestimate equity concerns. |
| Keywords: | Corporate Taxation, Consumption Taxation, Tax Competition, Fiscal Externality, Revenue Effects |
| JEL: | H20 H21 H25 F68 |
| URL: | https://d.repec.org/n?u=RePEc:mpi:wpaper:tax-mpg-rps-2023-26 |
| By: | Di Nola, Alessandro; Kocharkov, Georgi; Scholl, Almuth; Tkhir, Anna-Mariia; Wang, Haomin |
| Abstract: | This paper studies the aggregate and distributional effects of raising the top marginal income tax rate in the presence of tax avoidance. To this end, we develop a quantitative macroeconomic model with heterogeneous agents and occupational choice in which entrepreneurs can avoid taxes in two ways. On the extensive margin, entrepreneurs can choose the legal form of their business organization to reduce their tax burden. On the intensive margin, entrepreneurs can shift their income between different tax bases. In a quantitative application to the US economy, we find that tax avoidance weakens the distortionary effects of higher income taxes at the top but makes them ineffective at lowering inequality. Eliminating tax avoidance by implementing an equal tax treatment of entrepreneurs across all legal forms of business organization substantially increases tax revenue, aggregate output, and welfare. |
| Keywords: | Tax Avoidance, Top Income Tax Rate, Occupational Choice, Legal Form of Organization, Wealth Inequality, Incomplete Markets, Heterogeneous Agents |
| JEL: | E21 E62 H25 H26 H32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:300700 |
| By: | ANDRADE, Maira; , Daniel Costa; Weiss-Cohen, Leonardo; Torrance, Jamie (Swansea University); Newall, Philip Warren Stirling (University of Warwick) |
| Abstract: | Mobile-based trading apps have made investing easier than ever before, but this includes enabling access to risky investments that many investors may not be able to trade safely. The UK financial regulator thereby requires Contract for Difference (CFD) trading apps to make disclosures such as, “89% of retail investor accounts lose money when trading CFDs with this provider”. However, these disclosures might be counteracted by either their suboptimal implementation, or by other aspects of these apps’ deceptive choice architecture. Therefore, the present study audited choice architecture characteristics of demo-modes of the 14 most-popular CFD trading apps in the UK. A content analysis found for example that 31.6 per cent of risk warnings did not comply with the regulator’s standards, and that only 35.7 per cent of apps contained risk warnings within the app’s main tabs. A thematic analysis suggested that apps’ educational resources could instil users with the hope of winning, by emphasising practice, strategies, and psychological mindset – instead of acknowledging luck as the predominant factor underlying CFD trading profitability. Overall, this study added to previous research highlighting the similarities between certain high-risk investments and gambling, and added to the behavioural public policy literature on deceptive choice architecture. |
| Date: | 2024–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:wt6vb |