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Book part
Publication date: 22 October 2019

Are Earnings Repatriation Elections under the 2004 American Jobs Creation Act Influenced by APB 23 Declarations?

B. Anthony Billings, Chansog (Francis) Kim and Cheol Lee

In view of the recent enhanced concerns of the SEC and PCAOB that Accounting Principles Board Opinion No. 23 (APB 23)–asserting firms do not comply with the “sufficient…

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Abstract

In view of the recent enhanced concerns of the SEC and PCAOB that Accounting Principles Board Opinion No. 23 (APB 23)–asserting firms do not comply with the “sufficient evidence” criteria of APB 23, we examine whether APB 23–asserting firms that declared their foreign earnings as permanently reinvested abroad are less likely to repatriate those foreign earnings under the American Jobs Creation Act (AJCA) of 2004, compared with similar non-asserting firms. The asserting firms are required to disclose sufficient evidence that validates an ability to meet their domestic cash needs with only earnings generated in the United States and their plans to indefinitely reinvest foreign earnings outside the United States. Estimates show that asserting firms are more likely to repatriate their foreign earnings than non-asserting firms. In addition, we find that the probability of making an election to repatriate permanently invested foreign earnings under the AJCA of 2004 is higher for firms with nonbinding foreign tax credit (FTC) limitations that have made an APB 23 declaration to permanently invest foreign earnings abroad. These findings suggest that asserting firms’ declarations to indefinitely reinvest foreign earnings abroad are not well grounded, thereby indirectly validating the SEC’s and PCAOB’s increased scrutiny for supporting evidence for APB 23 assertion. The estimates also show that the likelihood of making an election to repatriate foreign earnings under the AJCA of 2004 increases with asserting firms’ liquidity constraints and financial distress: the financial characteristics listed as part of APB 23 criteria of sufficient evidence and highlighted by the SEC and PCAOB comment letters, indicating that asserting firms raid permanently reinvested foreign earnings to satisfy their financial needs and constraints.

Details

Advances in Taxation
Type: Book
DOI: https://doi.org/10.1108/S1058-749720190000026002
ISBN: 978-1-78973-293-1

Keywords

  • Accounting Principles Board Opinion No. 23
  • permanent reinvestment of foreign earnings
  • American Jobs Creation Act of 2004
  • temporary tax holiday
  • foreign earnings repatriation
  • financial constraint

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Book part
Publication date: 9 December 2020

The Relation between Equity Incentives and Earnings Management through Permanently Reinvested Foreign Earnings for US Multinational Corporations

Zhan Furner, Keith Walker and Jon Durrant

Krull (2004) finds that US multinational corporations (MNCs) increase amounts designated as permanently reinvested earnings (PRE) to maximize reported after-tax earnings…

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Abstract

Krull (2004) finds that US multinational corporations (MNCs) increase amounts designated as permanently reinvested earnings (PRE) to maximize reported after-tax earnings and meet earnings targets. We extend this research by examining the relationship between executive equity compensation and the opportunistic use of PRE by US MNCs, and the market reaction to earnings management using PRE designations. Firms use equity compensation to incentivize executives to strive for maximum shareholder wealth. One unintended consequence is that executives may engage in earnings management activities to increase their equity compensation. In this study, we examine whether the equity incentives of management are associated with an increased use of PRE. We predict and find strong evidence that the changes in PRE are positively associated with the portion of top managers' compensation that is tied to stock performance. In addition, we find this relationship to be strongest for firms that meet or beat forecasts, but only with the use of PRE to inflate income, suggesting that equity compensation incentivizes managers to opportunistically use PRE, especially to meet analyst forecasts.

Further, we provide evidence that investors react negatively to beating analysts' forecasts with the use of PRE, suggesting that investors find this behavior opportunistic and not fully convincing. This chapter makes an important contribution to what we know about the joint effects of tax policy, generally accepted accounting principles, and incentive compensation on the earnings reporting process.

Details

Advances in Taxation
Type: Book
DOI: https://doi.org/10.1108/S1058-749720200000028005
ISBN: 978-1-80043-327-4

Keywords

  • Permanently reinvested earnings
  • foreign earnings
  • tax incentives
  • equity compensation
  • earnings management
  • earnings surprise

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Book part
Publication date: 9 December 2020

The Use of Tax Accruals to Fool the Market: The Case of PRE before the Tax Cuts and Jobs Act

Zhan Furner, Michaele L. Morrow and Robert C. Ricketts

In this chapter we analyze how the designation of foreign earnings as “permanently reinvested” outside the US (PRE) is related to subsequent firm growth and market…

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Abstract

In this chapter we analyze how the designation of foreign earnings as “permanently reinvested” outside the US (PRE) is related to subsequent firm growth and market returns. Prior research suggests that firms that hold excess cash in foreign markets to avoid the US corporate income tax experience lower growth, since such “trapped” cash is inefficiently invested. However, foreign earnings can be inefficiently invested in forms other than cash. We hypothesize and find that as the ratio of PRE to total assets increases, firms' growth rates decline. Our results suggest that trapped earnings, and not just trapped cash, are associated with lower growth. Because PRE have also been associated with earnings management in the literature, we further analyze the association between the use of PRE to meet or beat earnings targets and subsequent growth, observing a significant and persistent negative association. Finally, we note that the market discount for PRE, and especially for the use of PRE to manage earnings, appears to be relatively small. Our results provide support for FASB's stated plans to increase disclosure requirements surrounding the tax accrual.

Details

Advances in Taxation
Type: Book
DOI: https://doi.org/10.1108/S1058-749720200000028004
ISBN: 978-1-80043-327-4

Keywords

  • Permanently reinvested earnings
  • lockout earnings
  • growth
  • earnings management
  • market response
  • tax accrual

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Article
Publication date: 14 May 2019

Aggressive tax planning and stock price synchronicity: evidence from China

Hua Feng, Ahsan Habib and Gao liang Tian

The purpose of this paper is to investigate the association between aggressive tax planning and stock price synchronicity.

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Abstract

Purpose

The purpose of this paper is to investigate the association between aggressive tax planning and stock price synchronicity.

Design/methodology/approach

Employing the special institutional background of China, this study constructs tax aggressiveness and stock price synchronicity measures for a large sample of Chinese stocks spanning the period 2003–2015. The authors employ OLS regression as the baseline methodology, and a fixed effect model, the Fama–Macbeth method and GMM as sensitivity checks. Matched samples and difference-in-difference analyses are used to control for endogeneity.

Findings

The authors find a significant and positive association between aggressive tax planning and stock price synchronicity. Because material information about risky tax transactions tends to be hidden in various tax accruals accounts, aggressive tax strategies make financial statements less transparent, thereby, increasing information asymmetry and decreasing stock price informativeness. The authors also find that the firms engaging in aggressive tax planning exhibit relatively high corporate opacity. In addition, the authors find that improvements in the tax enforcement regime, ownership status and high-quality auditors all constrain the adverse effects of tax aggressiveness.

Practical implications

This study has important practical implications for China’s regulators, who are striving to reduce the tax burden of enterprises. It also helps investors to consider investment decisions more appropriately from a taxation perspective.

Originality/value

First, this paper contributes to the stock price efficiency literature by identifying the effect of a hitherto unexamined factor, namely, firm-level aggressive tax planning, on the efficiency of stock prices. Second, this study provides further empirical evidence to support the agency view of tax aggressiveness, and the informational interpretation of stock price synchronicity. Third, this study helps us better understand the effects of firm-level tax policy on firm-specific information capitalization in an environment where overall country-level investor protection is relatively weak.

Details

International Journal of Managerial Finance, vol. 15 no. 5
Type: Research Article
DOI: https://doi.org/10.1108/IJMF-07-2018-0194
ISSN: 1743-9132

Keywords

  • China
  • Stock price synchronicity
  • Aggressive tax planning
  • Corporate opacity

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Book part
Publication date: 22 October 2019

Prelims

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Abstract

Details

Advances in Taxation
Type: Book
DOI: https://doi.org/10.1108/S1058-749720190000026001
ISBN: 978-1-78973-293-1

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Book part
Publication date: 15 November 2018

Short Selling and Corporate Tax Avoidance

Savannah (Yuanyuan) Guo, Sabrina Chi and Kirsten A. Cook

This study examines short selling as one external determinant of corporate tax avoidance. Prior research suggests that short sellers have information advantages over…

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Abstract

This study examines short selling as one external determinant of corporate tax avoidance. Prior research suggests that short sellers have information advantages over retail investors, and high short-interest levels are a bearish signal of targeted stock prices. As a result, when short-interest levels are high, managers have been shown to take actions to minimize the negative effect of high short interest on firms’ stock prices. Tax-avoidance activities may convey a signal of bad news (i.e., high stock price crash risk). We predict that, when short-interest levels are high, managers possess incentives to reduce firm tax avoidance in order to reduce the associated stock price crash risk. Consistent with this prediction, we find that short interest is negatively associated with subsequent tax-avoidance levels. This effect is incremental to other factors identified by prior research. We conclude that short selling significantly constrains corporate tax avoidance.

Details

Advances in Taxation
Type: Book
DOI: https://doi.org/10.1108/S1058-749720180000025001
ISBN: 978-1-78756-416-9

Keywords

  • Short selling
  • tax avoidance
  • stock price crash risk
  • effective tax rates
  • book-tax differences
  • tax shelters

Content available
Book part
Publication date: 9 December 2020

Prelims

Free Access
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Advances in Taxation
Type: Book
DOI: https://doi.org/10.1108/S1058-749720200000028008
ISBN: 978-1-80043-327-4

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Article
Publication date: 22 February 2008

Income shifting and corporate taxation: the role of cross‐border intrafirm transfers

Kingsley O. Olibe and Zabihollah Rezaee

The purpose of this paper is to examine the cross‐sectional relation between the value of cross‐border intrafirm transfers (CITs) and three dependent variables: return on…

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Abstract

Purpose

The purpose of this paper is to examine the cross‐sectional relation between the value of cross‐border intrafirm transfers (CITs) and three dependent variables: return on investment (ROI), the US effective tax rate (ETRUS), and the global effective tax rate (ETRGL) to assess the existence or nonexistence of cross‐jurisdictional income shifting.

Design/methodology/approach

Regression analysis is used to test the relationship between CIT and accounting performance and effective tax rates.

Findings

The results indicate that ROI and ETRUS increase whereas ETRGL decreases with the extent of CITs after we control for variables that impact earnings and taxes (e.g. size, industry classification, internationalization, tax shelter, and growth). This suggests that firms earn income, on average, in jurisdictions with tax rates greater than the USA, such that diverting income from overseas to the USA is a tax‐saving action. The tax results are consistent with Jacob and Mills and Newberry's findings that firms shifted income into the USA. The results also reveal that companies that engage in CITs are those that are large, relatively more profitable, and pay more US taxes.

Research limitations/implications

This study does not differentiate between transfer pricing schemes for tax minimization reasons from those done for earnings management purposes, which should be addressed by future research.

Practical implications

Results have public policy implications as an understanding of how CITs affect accounting performance and taxes is important for the craft of tax policy and transfer price regulation.

Originality/value

This study furthers our understanding of the impact of CITs on earnings and taxes, an important component of accounting research which has not been properly addressed by prior studies.

Details

Review of Accounting and Finance, vol. 7 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/14757700810853860
ISSN: 1475-7702

Keywords

  • Return on investment
  • Taxes
  • Tax planning
  • Earnings
  • Income
  • United States of America

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Article
Publication date: 18 April 2016

Do US pharmaceutical companies strategically shift income to international affiliates?

Andrew M. Brajcich, Daniel L. Friesner and Tim J. Schibik

The purpose of this study is to empirically identify incentives that drive resource shifting by US pharmaceutical firms to comparatively low-tax jurisdictions.

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Abstract

Purpose

The purpose of this study is to empirically identify incentives that drive resource shifting by US pharmaceutical firms to comparatively low-tax jurisdictions.

Design/methodology/approach

Using a panel of publicly listed companies, we investigate whether resource shifting is facilitated by two underlying factors. First, we examine whether pharmaceutical manufacturers whose intangible assets are disproportionately held as intellectual property are more or less likely to shift resources to jurisdictions outside of the USA. Second, we empirically determine whether manufacturers that derive most of their revenues from producing a specific type of product are more or less likely to shift income-producing resources to their international affiliates.

Findings

The empirical results suggest that pharmaceutical factors do practice strategic resource shifting. Moreover, pharmaceutical manufacturers which produce biologic medications are significantly less likely than other manufacturers to practice resource shifting. We find no evidence to suggest that firms whose intangible assets are more composed of intellectual property are any more or less likely to practice resource shifting.

Originality/value

To date, a plethora of studies exist which examine resource shifting in a large, general population of multinational corporations. However, there are relatively few studies that examine international resource shifting in the pharmaceutical industry.

Details

Multinational Business Review, vol. 24 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/MBR-06-2015-0025
ISSN: 1525-383X

Keywords

  • Pharmaceutical industry
  • Outsourcing
  • Income shifting
  • International taxation
  • Tax competition
  • H26
  • F23

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Article
Publication date: 21 January 2021

Culture, institutional quality and earnings management: an international evidence

Ahmed Yamen, Cemil Kuzey and Muhammet Sait Dinc

This paper examines the link between culture, institutional quality and real earnings management and accrual earnings management by combing the study by Hofstede (2001…

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Abstract

Purpose

This paper examines the link between culture, institutional quality and real earnings management and accrual earnings management by combing the study by Hofstede (2001) and Enomoto et al. (2015). The paper tries to test the effect of culture on institutional quality and both real earnings management (REM) and accrual earnings management (AEM).

Design/methodology/approach

The sample of the research paper includes 38 countries. Hofstede cultural dimensions are used to measure cultural values. Public governance indicators published by the World Bank are used as a proxy for measuring the institutional quality. Earning management scores constructed by Enomoto et al. (2015, p. 191) are used for measuring real earnings management (REM) and accrual earnings management (AEM). Partial Least Square (PLS) based Structural Equation Modelling (SEM) is used to test the relationship between culture, institutional quality and earnings management.

Findings

The results support the relationship between culture and institutional quality. Also, the results reveal a significant relationship between culture and accrual earnings management, but an insignificant relationship between culture and real earnings management. In addition to that, another important finding is that institutional quality has a significant impact on real earnings management, but has no significant effect on accrual earnings management.

Practical implications

The results suggest that standard setters need to consider the quality of institutions to improve the quality of financial reports. Also, it highlights the role of both formal and informal cultures in shaping financial reports.

Originality/value

For the best of our knowledge, this the first time to test the link between culture and institutional quality and comparing the impact on both real earnings management and accrual earnings management.

Details

EuroMed Journal of Business, vol. ahead-of-print no. ahead-of-print
Type: Research Article
DOI: https://doi.org/10.1108/EMJB-06-2020-0068
ISSN: 1450-2194

Keywords

  • Culture dimensions
  • Governance indicators
  • Institutional quality
  • Earnings management

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