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1 – 10 of over 57000Dawei Jin, Hao Shen, Haizhi Wang and Desheng Yin
This chapter investigates whether and to what extent tax benefits affect the likelihood of firms undertaking leveraged buyout (LBO) transactions.
Abstract
Purpose
This chapter investigates whether and to what extent tax benefits affect the likelihood of firms undertaking leveraged buyout (LBO) transactions.
Design/Methodology/Approach
With an identified sample of LBO firms and similar non-LBO counterparts, this chapter utilizes staggered changes in state corporate income tax rates as exogenous shocks and adopts a Logistic regression to analyze how these tax changes affect firms' probability of engaging in LBOs.
Findings
Firms are more likely to engage in LBOs after increases in corporate income tax rates. Specifically, the increase in the likelihood of firms undertaking LBOs following tax increases is between 6.9% and 12.9%. We also find that this positive relation is more pronounced for firms with higher levels of return on assets (ROA) and marginal tax rates (MTR). Finally, we report that the mean value of tax benefits accounts for between 28.5% and 170% of the premium paid to pre-buyout shareholders.
Originality/Value
This chapter provides strong evidence that tax benefits constitute an important source of value creation in LBOs and adds to the debate regarding the role of tax benefits in LBOs.
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Gabriela S. Wolfson and Merl M. Hackbart
Using data obtained from the National Conference of State Legislatures (NCSL), we investigate modifications in state tax codes to determine their characteristics, the apparent…
Abstract
Using data obtained from the National Conference of State Legislatures (NCSL), we investigate modifications in state tax codes to determine their characteristics, the apparent trends of state tax reform, and whether changes constituted comprehensive reform or mere incremental adjustments to existing tax structures. Based on the data, we find that few states achieved comprehensive tax reform in the 1990s despite the fiscal surplus that provided an environment conducive to widespread change. Moreover, we find that a significant number of changes that were enacted in the 1990s involved increases or decreases in state tax revenue that were ultimately tied to economic cycles. We suggest that adequacy in state tax collections may be the most common tax principle adhered to with regard to changes in tax structure. We also conclude that reform efforts in the 1990s were most successful when approached in an incremental fashion in the absence of a significant precipitating reform driver.
Dawei Jin, Hao Shen, Haizhi Wang and Desheng Yin
The purpose of this paper is to empirically explore whether and to what extent the changes in state corporate income tax rates affect corporate tax aggressiveness.
Abstract
Purpose
The purpose of this paper is to empirically explore whether and to what extent the changes in state corporate income tax rates affect corporate tax aggressiveness.
Design/methodology/approach
Using a differences-in-differences approach with dynamic treatment, the authors investigate the effect of staggered changes in state corporate income tax rates in the USA on corporate tax aggressiveness.
Findings
Firms become more aggressive in avoiding taxes following state tax increases but are insensitive to tax cuts. The effect of state tax increases on tax aggressiveness is weaker for firms with greater debt tax shields and marginal tax rates. Firms are more likely to shift their operations and relocate their headquarters out of states experiencing tax increases.
Originality/value
To the best of the authors' knowledge, this paper is the first to study the relation between state tax policy changes and corporate tax aggressiveness. This paper finds an asymmetrical pattern of corporate tax aggressiveness in response to state tax changes.
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The purpose of this paper is to examine three different responses to the Finnish 2005 tax reform that, among other things, reduced the corporate tax rate and hiked dividend…
Abstract
Purpose
The purpose of this paper is to examine three different responses to the Finnish 2005 tax reform that, among other things, reduced the corporate tax rate and hiked dividend taxation. Focus lies on the factors influencing the decision to change the fiscal year-end and whether earnings management is more prevalent when the decision is not taken.
Design/methodology/approach
This study uses the financial statement data of Finnish private firms and studies 350 fiscal year-end changing firms and 700 non-changing firms with logistic and linear regression analysis. Discretionary accruals are the proxy for earnings management.
Findings
The results suggest that firms seize the window of opportunity and extend fiscal years depending on the magnitude of the expected tax savings. Firms that do not change their fiscal year-end engage in more tax-induced earnings management. In terms of economic consequences, the earnings management approach is less economically significant.
Research limitations/implications
This study only examines a limited number of firms that change their fiscal year-end, hence, care has been exercised in generalising the findings.
Practical implications
The findings may be considered when structuring future tax reforms, particularly when considering transition rules relating to changes in fiscal year-ends. The study may also have implications beyond tax reforms since the evidence of opportunistic changes in the fiscal year-end can be informative for tax authorities, independent auditors and creditors.
Originality/value
This study contributes to the relatively scarce literature on private firm responses to tax policy changes by analysing both upward and downward earnings management, as well as changes in the fiscal year-end. This is in contrast to previous research that mainly focusses on listed firms and absolute earnings management or earnings management in one direction.
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Mark P. Bauman and Cathalene Rogers Bowler
This study examines the impact of FASB Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income Taxes, on earnings management (EM) activity, by focusing on changes in…
Abstract
This study examines the impact of FASB Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income Taxes, on earnings management (EM) activity, by focusing on changes in the deferred tax asset valuation allowance (DTVA). FIN48 was adopted, in part, over concerns that firms were using the reserve for uncertain tax positions (cushion) to manage earnings. However, there are reasons to believe that the adoption of FIN48 may have impacted the extent to which firms utilize DTVA changes as a strategic accounting choice. As the provision for income taxes is one of the final accounts closed prior to an earnings announcement, income tax accounting is generally regarded as a final opportunity to strategically meet earnings goals. To the extent that FIN48 reduced cushion-based EM, firms may have increasingly used DTVA changes as a substitute. Alternatively, the attention that FIN48 brought to firms’ income tax footnotes may have curbed the strategic use of income tax accounting, in general. This study employs a sample of publicly traded US firms over the period of 2003–2010. A regression model and an analysis of the frequency of DTVA-based EM reveal no evidence of a systematic change in behavior attributable to FIN48. However, further analysis reveals that firms identified as managing earnings to meet analyst forecasts increasingly used discretionary DTVA changes relative to changes in tax cushion in the post-FIN48 period. The results have implications for existing research on income tax-based EM.
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Emmanouil Platanakis and Charles Sutcliffe
Although tax relief on pensions is a controversial area of government expenditure, this is the first study of the tax effects for a real-world defined benefit pension scheme…
Abstract
Although tax relief on pensions is a controversial area of government expenditure, this is the first study of the tax effects for a real-world defined benefit pension scheme. First, we estimate the tax and national insurance contribution (NIC) effects of the scheme's change from final salary to career average revalued earnings (CARE) in 2011 on the gross and net wealth of the sponsor, government, and 16 age cohorts of members, deferred pensioners, and pensioners. Second, we measure the size of the twelve income tax and NIC payments and reliefs for new members and the sponsor, before and after the rule changes. We find the total subsidy split is roughly 40% income tax subsidy and 60% NIC subsidy. If lower tax rates in retirement and the risk premium effect of the exempt-exempt-taxed (EET) system are not viewed as a tax subsidy, the tax subsidy to members largely disappears. Any remaining subsidy drops, as a proportion of pension benefits, for high earners, as does that for NICs.
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Orsetta Causa and Mikkel Hermansen
This paper produces a comprehensive assessment of income redistribution to the working-age population, covering OECD countries over the last two decades. Redistribution is…
Abstract
This paper produces a comprehensive assessment of income redistribution to the working-age population, covering OECD countries over the last two decades. Redistribution is quantified as the relative reduction in market income inequality achieved by personal income taxes (PIT), employees’ social security contributions, and cash transfers, based on household-level micro-data. A detailed decomposition analysis uncovers the respective roles of size, tax progressivity, and transfer targeting for overall redistribution, the respective role of various categories of transfers for transfer redistribution; as well as redistribution for various income groups. The paper shows a widespread decline in redistribution across the OECD, both on average and in the majority of countries for which data going back to the mid-1990s are available. This was primarily associated with a decline in cash transfer redistribution while PIT played a less important and more heterogeneous role across countries. In turn, the decline in the redistributive effect of cash transfers reflected a decline in their size and in particular by less redistributive insurance transfers. In some countries, this was mitigated by more redistributive assistance transfers but the resulting increase in the targeting of total transfers was not sufficient to prevent transfer redistribution from declining.
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