Estimates of the Magnitude of Financial and Tax Reporting Conflicts

This study examines the tax reporting consequences of financial reporting discretion. Using a matched sample of financial statements with tax returns, I provide estimates of the accuracy of tax return information inferred from financial statements. To examine the tradeoffs between financial and tax reporting, I model the relation discretionary financial accounting accruals have to discretionary federal tax accruals. The methodology takes advantage of the contemporaneous nature of reporting to mitigate econometric problems identified in previous research. I find the extent tax reporting reflects discretionary financial reporting varies dramatically by industry, profitability, and the sign of discretionary accruals. I also find managers are able to undertake tax reducing activities with less of an effect on financial reporting than tax increasing accruals, consistent with recent evidence on the differential growth of book and tax income, and with tax avoidance activities.

Incorporating Financial Statement Information to Improve Forecasts of Corporate Taxable Income

We contribute to the research on the information content of earnings as it applies to the forecasting of economic activity across reporting models. We examine whether publicly available financial statement information is incrementally useful in forecasting confidentially reported taxable income. More precise firm-level taxable income forecasts can improve policymakers’ modeling of the tax system and their ability to analyze the effect of proposed changes in corporate tax law. When aggregated, improved micro-forecasts can also yield more accurate macro-forecasts of corporate taxable income, a significant component of the federal budget. We find that financial statement information improves firm-level estimates of future taxable income by providing more timely information. We also document the usefulness of the deferred tax valuation allowance in improving taxable income estimates for loss firms. Our evidence suggests public financial statement information complements proprietary data to improve estimates of future taxable income for budgetary and policy use

Costly dividend signaling : the case of lost firms with negative cash flows

Title from cover."January 2004.

Measuring the incentive effects of state tax policies toward capital investment

Empirical research on the effects of differential business taxation across jurisdictions relies on the appropriate measurement of the burden of tax in each location. While numerous summary measures have been proposed and used in various contexts to make such comparisons, most fail to account for the full effects of each state's tax system and the interactions of state tax systems with both local and federal taxes. This paper addresses these issues and employs an approach used in recent state tax reform studies to measure tax burdens. The advantages of this "representative firm" approach over traditional measures are discussed, and its empirical significance is tested. ; The empirical properties of tax burdens measured via a representative firm are very different from simpler, conventional measures. Taxes are estimated to play a negligible role in decisions concerning where to locate capital investment. This result, coupled with recent results showing the responsiveness of sales and employment decisions to apportionment changes, is consistent with the hypothesis of the existence of a hierarchy of behavioral responses to tax changes.Taxation ; Capital investments

Reporting Conservatism, Loss Reversals, and Earnings-based Valuation

We study the determinants of losses and their increased frequency over time to understand their implications for the use of financial statements in valuation. We find the properties of losses change between 1971-2000 both in terms of the cash flow and accruals components. Departing from prior research, we explicitly model the estimated likelihood of loss reversal. We find firms estimated to be least likely to reverse have unusually large negative cash flows and accruals, comprised of relatively large amounts of R&D expenditures and Special Items. We also find the market assesses both the effect of reporting conservatism and the attractiveness of abandoning the investment in the firm when it prices losses. We interpret this as evidence that the probability of loss reversal summarizes financial information useful to investors and serves as a proxy for the earning power of assets when the firm reports a lo