Earnings management by acquiring firms in stock for stock mergers

Erickson, Merle; Wang, Shiing‐wu

doi:10.1016/s0165-4101(99)00008-7

Cited by 600 publications

(497 citation statements)

References 14 publications

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“…Again, I attribute the lack of significance to measurement error. The g-index is a composite measure of corporate governance and may not be a good proxy for the governance issues likely associated with 33 Studies of capital market reasons for earnings management also show that managers overstate earnings prior to equity offerings (Teo, Welch, and Wong 1998) and stock-financed acquisitions (Erickson and Wang 1998). The planning time frame for these events may be long enough to make investing in a tax shelter a feasible strategy for increasing financial income.…”

Section: Logit Modelmentioning

confidence: 99%

The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

Brown

2011

The Accounting Review

193

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This paper investigates the spread of aggressive corporate tax reporting by modeling a firm's decision to adopt the corporate-owned life insurance (COLI) shelter. I use a sample of known COLI participants to examine whether certain firm characteristics are associated with the decision to adopt a COLI shelter. I find some evidence that firms with higher performancematched discretionary accruals are more likely to adopt a COLI shelter, suggesting a positive relation between aggressive financial reporting and aggressive tax reporting. I also find that firms with greater capital market visibility are less likely to adopt a COLI shelter, consistent with a potential reputational cost for being associated with aggressive tax avoidance activities. Further, my results suggest that COLI adopters are generally R&D intensive firms with low leverage and few foreign operations. In addition to firm specific characteristics, I consider two explanations for the spread of COLI adoption motivated by theory on diffusion of innovations and institutional isomorphism. I investigate whether firms imitate prior COLI adopters and whether COLI adoption spreads through common auditors. My results are not consistent with an imitation vii explanation. Further, my results suggest that having the same auditor as a prior COLI adopter does not increase the likelihood that a firm will adopt COLI.viii Table of PART I 6Chapter The tax shelter industry also distorts allocation of economic resources. Tax shelter activity diverts resources away from the government toward accountants, lawyers and others who develop and promote tax shelters. Moreover, according to theories of corporate tax incidence, engaging in a tax shelter cannot make a corporation, per se, better off. The benefits from reducing the corporation's tax bill will ultimately accrue to its shareholders through higher stock prices, its employees through higher wages, or its customers through lower prices. Exactly how the benefits will be shared is unknown, but Slemrod (2004) Frank et al. 2006). 3 However, ETRs and book-tax differences are noisy measures of aggressive tax reporting. ETRs vary with profitability, industry differences in the reporting of revenue and expenses, and legitimate tax planning opportunities. Consequently, it is difficult to distinguish lower ETRs due to better tax planning from those due to aggressive avoidance or shelter activity. List of TablesTreasury's (1999) report suggests that the growing gap between financial statement income and 2 Many studies rely on Bankman's (2004a) working definition of a tax shelter as a "(1) tax motivated; (2) transaction unrelated to a taxpayer's normal business operations; that (3) under a literal reading of some relevant legal authority; (4) produces a loss for tax purposes in excess of any economic loss; (5) in a manner inconsistent with legislative intent or purpose." See also Bankman (1999).3 Graham and Tucker (2006) identify known tax shelter participants. However, their study focuses on firms' debt policy decisions, no...

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Section: Logit Modelmentioning

confidence: 99%

The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

Brown

2011

The Accounting Review

193

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“…These decisions cover a wide range such as the choice of accounting methods (Moses, 1987), inventories valuation criteria (Niehaus, 1989), extraordinary expenses and incomes (Beattie et al, 1994), R&D expenditures (Bange and DeBondt, 1998) or accruals (Bannister and Newman, 1996; DeFond and Park, 1997). One of the most outstanding of these procedures are accruals and literature has paid a special attention to them in recent years (Jones, 1991;DeFond and Subramanyan, 1998;Erikson and Wang, 1999;Healy and Wahlen, 1999). The aim of that kind of accounting adjustments is to improve the informational content of financial statements and to avoid the mismatching between cash flows and the flow of income and expenses.…”

Section: Managers' Discretionary Behaviour Earnings Management Corpmentioning

confidence: 99%

Earnings management and internal mechanisms of corporate governance: Empirical evidence from Chilean firms

López‐Iturriaga¹,

Saona²

2005

COC

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We analyze the ability of the capital structure and the ownership structure as mechanisms of control of the managers of the firms and to reduce their accounting discretionary power for a sample of Chilean firms. Using earnings management and abnormal accruals as indicators of discretionary behavior, our results show that both debt and ownership concentration reduce the managers' discretionary behavior, so we corroborate the outstanding role both mechanisms play in a country with low protection of investors' rights. At the same time, we find that earnings management is fostered by institutional investor ownership.

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“…Graham et al (2004) present CFOs with hypothetical scenarios and find that 41% of them would be willing to pass up a positive-NPV project just to meet the analyst consensus EPS estimate. Direct evidence of this type of value loss is difficult to document, but Jensen (2004) presents a range of anecdotes, and highly suggestive empirical studies include Teoh et al (1998a,b), Erickson and Wang (1999), Bergstresser, Desai, and Rauh (2004), and Pshisva and Saurez (2004). The last three papers report that earnings management activity increases prior to stock acquisitions.…”

Section: E3 Earnings Managementmentioning

confidence: 99%

Behavioral Corporate Finance: A Survey

Baker

Ruback²,

Wurgler

2004

SSRN Journal

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Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that managers are less than fully rational. It studies the effect of nonstandard preferences and judgmental biases on managerial decisions. This survey reviews the theory, empirical challenges, and current evidence pertaining to each approach. Overall, the behavioral approaches help to explain a number of important financing and investment patterns. The survey closes with a list of open questions.

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Earnings management by acquiring firms in stock for stock mergers

Cited by 600 publications

References 14 publications

The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

Earnings management and internal mechanisms of corporate governance: Empirical evidence from Chilean firms

Behavioral Corporate Finance: A Survey

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