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on Accounting and Auditing |
| By: | Correia, Maria |
| Abstract: | This paper reviews the extensive literature on the predictive power of accounting information for bankruptcy. Prior research demonstrates that financial statement information effectively predicts bankruptcy out-of-sample, both independently and in combination with market data. I discuss several attributes of accounting information that may enhance or impair its utility in bankruptcy prediction. Using a comprehensive dataset of bankruptcies from 1980 to 2023, I analyse how the role of accounting information in credit risk assessment has evolved over the past four decades. My findings reveal that the predictive power of models based solely on accounting information has remained stable over the most recent decades, whereas the predictive power of equity market information has shown a modest increase. Notably, the performance of accounting and market-based models does not always align. In periods of declining market information efficacy, accounting information often remains robust, mitigating the impact on combined models. Conversely, market information frequently offsets reductions in the predictive power of accounting data, underscoring the complementary strengths of these information sources. |
| Keywords: | bankruptcy prediction; default; credit risk |
| JEL: | M40 |
| Date: | 2025–09–15 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128340 |
| By: | Bachas, Pierre; Brockmeyer, Anne; Ferreira, Alipio; Sarr, Bassirou |
| Abstract: | Can algorithms enhance bureaucrats’ work in developing countries? In data-poor environments, bureaucrats often exercise discretion over key decisions, such as audit selection. Exploiting newly digitized micro-data, this study conducted an at-scale field experiment whereby half of Senegal’s annual audit program was selected by tax inspectors and the other half by a transparent risk-scoring algorithm. The algorithm-selected audits were 18 percentage points less likely to be conducted, detected 89% less evasion, were less cost-effective, and did not reduce corruption. Moreover, even a machine-learning algorithm would only have moderately raised detected evasion. These results are consistent with bureaucrats’ expertise, the task complexity, and inherent data limitations. |
| Date: | 2025–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11205 |
| By: | De Simone, Lisa; Giese, Henning; Koch, Reinald; Rehrl, Christoph |
| Abstract: | This study examines the real effects of earnings stripping rules introduced in the European Union in 2019, which tie interest deductibility to contemporaneous profitability. Exploiting a quasi-natural experiment created by the EU's harmonized implementation under the Anti-Tax Avoidance Directive and using a difference-in-differences design, we analyze consolidated data from 3, 312 firms across 22 EU Member States from 2012 to 2023. We find that earnings stripping rules significantly reduce operational risk-taking, investment, and innovation, consistent with profit-contingent deductibility lowering the expected debt tax shield in low-profit years. These effects are particularly pronounced among firms with high pre-reform operating risk, which also experience slower growth and a higher likelihood of financial distress following the reform. This study contributes to the literature on corporate taxation and risk-taking, showing that profit-linked interest limitations have real effects and underscoring the importance of rule design in balancing anti-avoidance objectives with investment and innovation. |
| Keywords: | corporate risk-taking, capital structure, asymmetric taxation, earnings stripping rule |
| JEL: | G32 G33 H25 H26 H87 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:arqudp:325832 |
| By: | Natalia Jiménez-Jiménez (Universidad Pablo de Olavide); Elena Molis-Bañales (Universidad de Granada); Ángel Solano-García (Universidad de Granada) |
| Abstract: | In this paper, we analyze theoretically and experimentally the relationship of tax avoidance and voting decisions over the size of taxation. We propose a basic model of redistributive politics in which there are two types of voters (skilled and unskilled workers) and two exogenous tax schemes to vote for. We design a laboratory experiment to test the results of the model. We consider a control treatment where tax avoidance is not feasible. In the main treatments, only the high skilled workers are allowed to avoid taxes with a fixed cost that varies in two different treatments. We also consider two additional treatments with explicit or implicit information about tax avoidance decisions. The impossibility of tax avoidance favors the support for the high tax rate. A sufficiently high cost of tax avoidance makes unskilled workers vote mostly for a low tax rate and skilled workers opt for almost no tax avoidance. Nevertheless, if tax avoidance is cheap enough, a higher than predicted proportion of unskilled workers still vote for the low tax rate, even in a high tax avoidance context. The only effect of information occurs when the cost of tax avoidance is low, and it entails a decrease in tax avoidance levels. Finally, regardless the tax avoidance cost, a higher rate of tax avoidance yields to a higher likelihood of unskilled workers voting for the high tax rate, and, vice versa, a higher probability of voting for the high tax rate results in a higher tax avoidance level. |
| Keywords: | tax avoidance; voting; income inequality; real-effort task; information. |
| JEL: | C92 D72 H26 H30 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pab:wpaper:25.07 |
| By: | Justin E. Holz; Ricardo Perez-Truglia; Alejandro Zentner |
| Abstract: | The wealthiest individuals frequently engage in tax avoidance, and public awareness of this behavior is growing. Such awareness may undermine tax compliance among the broader population, either by revealing strategies others can emulate or by shifting social norms to make avoidance seem more acceptable. We first document that individuals are less tolerant of both tax avoidance and tax evasion when carried out by the wealthiest households. We next present results from a field experiment on property tax appeals, which—like other forms of tax avoidance—is used disproportionately by the wealthiest households. Providing information about the appeal rates of the richest-1% of households increased individuals' perceptions of unfairness, but did not affect their own appeal decisions—measured via administrative records—or even their expected tax savings. Information about the prevalence of appeals among comparable households also had no effect. By contrast, information about the expected financial gains from appealing had a significant effect on appeal choices. In sum, while the public condemns tax avoidance by the wealthiest households, we find no sign that such behavior encourages similar actions among the broader population. |
| JEL: | C9 H26 Z13 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34209 |
| By: | Marcel Ausloos; Probowo Erawan Sastroredjo; Polina Khrennikova |
| Abstract: | Pre-taxation analysis plays a crucial role in ensuring the fairness of public revenue collection. It can also serve as a tool to reduce the risk of tax avoidance, one of the UK government's concerns. Our report utilises pre-tax income ($PI$) and total assets ($TA$) data from 567 companies listed on the FTSE All-Share index, gathered from the Refinitiv EIKON database, covering 14 years, i.e., the period from 2009 to 2022. We also derive the $PI/TA$ ratio, and distinguish between positive and negative $PI$ cases. We test the conformity of such data to Benford's Laws, - specifically studying the first significant digit ($Fd$), the second significant digit ($Sd$), and the first and second significant digits ($FSd$). We use and justify two pertinent tests, the $\chi^2$ and the Mean Absolute Deviation (MAD). We find that both tests are not leading to conclusions in complete agreement with each other, - in particular the MAD test entirely rejects the Benford's Laws conformity of the reported financial data. From the mere accounting point of view, we conclude that the findings not only cast some doubt on the reported financial data, but also suggest that many more investigations be envisaged on closely related matters. On the other hand, the study of a ratio, like $PI/TA$, of variables which are (or not) Benford's Laws compliant add to the literature debating whether such indirect variables should (or not) be Benford's Laws compliant. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.09415 |
| By: | Yundan Guo; Han Liang; Li Shen |
| Abstract: | Against the backdrop of rapid technological advancement and the deepening digital economy, this study examines the causal impact of digital transformation on corporate financial asset allocation in China. Using data from A-share listed companies from 2010 to 2022, we construct a firm-level digitalization index based on text analysis of annual reports and differentiate financial asset allocation into long-term and short-term dimensions. Employing fixed-effects models and a staggered difference-in-differences (DID) design, we find that digital transformation significantly promotes corporate financial asset allocation, with a more pronounced effect on short-term than long-term allocations. Mechanism analyses reveal that digitalization operates through dual channels: broadening investment avenues and enhancing information processing capabilities. Specifically, it enables firms to allocate long-term high-yield financial instruments, thereby optimizing the maturity structure of assets, while also improving information efficiency, curbing inefficient investments, and reallocating capital toward more productive financial assets. Heterogeneity analysis indicates that firms in non-eastern regions, state-owned enterprises, and larger firms are more responsive in short-term allocation, whereas eastern regions, non-state-owned enterprises, and small and medium-sized enterprises benefit more in long-term allocation. Our findings provide micro-level evidence and mechanistic insights into how digital transformation reshapes corporate financial decision-making, offering important implications for both policymakers and firms. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.09095 |
| By: | Omar Di Marzio |
| Abstract: | We introduce the Cut-Based Valuation (CBV), a unified framework for consolidated value in equity/flow networks. The central idea is that economic value is never absolute: it is always defined relative to an observer Omega, which fixes perimeter, measurement basis, units/FX/PPP, discounting, informational regime, and control rules. Given Omega, the Cut Theorem shows that the consolidated value of a perimeter P depends only on boundary quantities across the cut P -> O, while internal reconnections are valuation-invariant. This provides (i) sufficient statistics for valuation with linear computational complexity, (ii) standardized reporting through the Perimeter-of-Validity and Cut Summary, and (iii) transformation laws that clarify how different observers relate. Applications span IFRS consolidation, national accounts, fund-of-funds, pyramids, and clearing networks, all seen as special cases of a general principle of economic relativity. Case studies (market capitalization by country, keiretsu, fund-of-funds) illustrate how CBV eliminates double counting while ensuring comparability and auditability. To address practical concerns, we establish robustness bounds that quantify how errors in initial data propagate to consolidated values, and we introduce a dynamic CBV-Fisher protocol for intertemporal comparisons, ensuring consistency with official chain-linking practices. These additions clarify the time scale of application, the role of averaging procedures, and the horizon of reliable measurement. Finally, we make explicit the scope and limitations of CBV: it is a normative measurement/consolidation rule in linear accounting environments, while in macroeconomic closures or with nonlinear payoffs it must be coupled with equilibrium or clearing models. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.04520 |
| By: | Alberto Montagnoli; Miroslava Quiroga-Trevino; Christoph Thoenissen |
| Abstract: | This paper provides empirical evidence on the balance sheet channel of fiscal policy in peripheral European economies. Our findings using a Panel VAR, reveal that shifts in financial institutions' balance sheets following a debt-financed fiscal expansion, reduce credit provision and investment in these countries. Moreover, the analysis indicates that economies with higher sovereign exposure experienced higher credit crunches and investment declines. To explore the underlying mechanisms, we estimate a DSGE model that incorporates banks as primary holders of sovereign debt. The model shows that sovereign exposure amplifies the negative effects on credit supply, lowering investment and capital formation. A counterfactual scenario without bank-held sovereign bonds isolates the contribution of the balance sheet channel: removing this channel weakens the crowding-out effect, with investment falling 0.2 percentage points less and output increasing by 0.02 percentage points more. These effects appear stronger during the financial and sovereign debt crises. |
| Keywords: | SVAR;DSGE;Bayesian estimation;Fiscal policy;Sovereign debt;Credit;Euro Area. |
| JEL: | C11 E32 E44 E62 H63 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2025-12 |
| By: | Kerola, Eeva; Laine, Olli-Matti; Paavola, Aleksi |
| Abstract: | This study examines the floating rate channel-a mechanism through which monetary policy affects firms' investment and credit demand based on their exposure to variable rate loans. Using a granular loan-level dataset from the euro area, we find that firms with variable rate loans significantly reduce their investment-related borrowing after monetary tightening, compared to firms with fixed rate loans. This effect is most pronounced among the smallest firms, consistent with the theoretical view that the floating rate channel is explained by financial constraints. Our results highlight the heterogeneity in firms' reactions to interest rate changes and underscore the importance of accounting for firm size and financial constraints in monetary policy analysis. |
| Keywords: | monetary policy, floating rate channel, euro area |
| JEL: | G21 G30 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:325483 |