Financial reporting, tax costs, and book-tax conformity

Guenther, David A.; Maydew, Edward L.; Nutter, Sarah E.

doi:10.1016/s0165-4101(97)00009-8

Cited by 156 publications

(125 citation statements)

References 17 publications

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“…Further, see the financial accounting literature on comparison of accounting across countries more generally (e.g., Ball et al, 2000) and a discussion of the international studies on book-tax conformity (Hanlon et al, 2008). 35 See Guenther et al (1997), Ali and Hwang (2000), Ball et al (2000), Ball et al (2003), Guenther and Young (2000), , , McClelland and Mills (2007), , , Atwood et al (2010), and Hanlon and Maydew (2009). (and process to determine the rules to compute the number) could be closer to the current taxable income than current book income. 36 If that were to occur, much of the philosophy of the FASB and the SEC (i.e., having an independent standard-setting board, full disclosure rules, etc.)…”

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confidence: 99%

A review of tax research

Hanlon¹,

Heitzman²

2010

Journal of Accounting and Economics

2,073

814

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Abstract:In this paper, we present a review of tax research. We survey four main areas of the literature: 1) the informational role of income tax expense reported for financial accounting, 2) corporate tax avoidance, 3) corporate decision-making including investment, capital structure, and organizational form, and 4) taxes and asset pricing. We summarize the research areas and questions examined to date and what we have learned or not learned from the work completed thus far. In addition, we provide our opinion as to the interesting and important issues for future research. ______________________This paper was prepared for the 2009 Journal of Accounting and Economics Conference. We appreciate comments from Scott Dyreng, Mihir Desai (discussant), S.P. Kothari (editor), John Long, Ed Maydew, Lillian Mills, Tom Omer, Sonja Rego, Doug Shackelford, Terry Shevlin, Joel Slemrod, Cliff Smith, David Weber, Ryan Wilson, Jerry Zimmerman, George Zodrow, and conference participants at the JAE Conference as well as at the 2009 University of North Carolina Tax Symposium and the discussant there, Bill Gentry. All errors and omissions are our own. * Corresponding author: 100 Main Street, Cambridge, MA. email: mhanlon@mit.edu. 1 A Review of Tax Research IntroductionIn this paper, we review tax research in accounting as well as tax research in economics and finance to the extent that it is related to or is affected by research in accounting. Shackelford and Shevlin (2001) provide a careful and thorough review of empirical tax research in accounting in the prior Journal of Accounting and Economics review volume. Shackelford and Shevlin limit their review to research published in accounting outlets and describe the development of the relatively young archival, microeconomic-based income tax literature that arose from the Scholes andWolfson framework. In his discussion of the review, Maydew (2001) emphasizes the need for tax researchers in accounting to think more broadly and to incorporate more theory and evidence from economics and finance. We agree. Tax research has a long history in many disciplines; this fact cannot be ignored. Our goal in this paper is to integrate the theoretical and empirical tax research from accounting, economics, and finance, to summarize what is known and unknown, and to offer suggestions for future research.The multidisciplinary nature of tax research is what makes tax research exciting (yes, exciting), yet difficult. Tax research can be difficult not only because one has to follow tax studies in accounting, finance, economics, and law (through academic institutions, governmental agencies, and policy think tanks), but also because different disciplines often use different languages and have different perspectives. 1 For example, economists generally focus on tax compliance, tax incidence (such as who bears the corporate tax), investment and economic growth effects (such as how taxes 1 Slemrod (1992a) characterizes these differences as economists studying what corporations actually do and accountants stud...

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confidence: 99%

A review of tax research

Hanlon¹,

Heitzman²

2010

Journal of Accounting and Economics

2,073

814

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“…These measurement deviations will lead to differences in Minnis's firms' inferred interest rates even when firms have identical interest rates on their debt. Indeed, Minnis's thesis is that the audit process will change the accounting values reported in the financial statements, which may alter the financial ratios, such as cost of debt, in a systematic manner (Guenther, Maydew, and Nutter, 1997 4 Using sample weights based on the population of US private firms the average (median) loan maturity is 53 (36) months.…”

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confidence: 99%

Discussion of The Value of Financial Statement Verification in Debt Financing: Evidence from Private U.S. Firms

Cassar

2011

J of Accounting Research

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I discuss Minnis [2010] in the context of the broader literature on private firm financing. In particular, I focus on the unique features of the private firm setting and how it affects research design and inference. I detail the alternative information sources available to debt financiers of private firms that may limit the role of auditors and firm financial statements. I review research in the private firm setting that documents the heightened importance of many omitted correlated variables such as the loan characteristics, contractual terms, and the characteristics of the entrepreneur that affect cost of debt. In evaluating the validity of Minnis's [2010] hypotheses and econometric methods, I report findings from a representative sample of private firms provided by the Federal Reserve Board's Survey of Small Business Finances. ABSTRACT:I discuss Minnis [2010] in the context of the broader literature on private firm financing. In particular, I focus on the unique features of the private firm setting and how it affects research design and inference.

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“…Using the same setting used in this paper, Hanlon, et al (2008) build on Guenther et al (1997) and develop a model of the relation between returns and earnings adapted from Holthausen and Watts (1988) and Kothari (2001) to show that noise in a signal reduces the price reaction to the signal. They argue that "noise in earnings could increase with conformity because of managers' inability (due to the tax cost of doing so) to convey private information useful to external stakeholders through earnings.…”

Section: Book-tax Conformity Evidencementioning

confidence: 99%

“…We examine a small sample of unique firms that were required by the TRA 86 to change their computation of taxable income from cash to accrual basis (hereafter, converting firms), therefore increasing their book-tax conformity. Guenther, et al (1997) find that the converting firms changed their financial reporting behavior in that they deferred revenue and accelerated expenses and Hanlon et al (2008) show that these changes reduced the informativeness of earnings to equity investors.…”

Section: Introductionmentioning

confidence: 99%

“…We explore the natural experiment created by the enactment of the Tax Reform Act of 1986 (hereafter, TRA 86 or the Act) and build on and extend the results in Guenther et al (1997) and Hanlon et al (2008) who also exploited this setting. We examine a small sample of unique firms that were required by the TRA 86 to change their computation of taxable income from cash to accrual basis (hereafter, converting firms), therefore increasing their book-tax conformity.…”

Section: Introductionmentioning

confidence: 99%

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Book-tax conformity and capital structure

2017

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We examine the effect of increased book-tax conformity on corporate capital structure. Prior studies document a decrease in the informativeness of accounting earnings for equity markets resulting from higher book-tax conformity. We argue that the decrease in earnings informativeness impacts equity holders more than debt holders because of the differences in payoff structures between debt and equity investments such that increases in book-tax conformity lead to increases in firms' reliance on debt capital. We exploit a natural experiment in the U.S. and find that firms facing an increase in required book-tax conformity increase leverage relative to other firms. We also provide evidence of an increase in the cost of equity (but not of debt) capital for firms facing an increase in required book-tax conformity relative to control firms and that these increases in cost of equity capital are positively associated with an increase in leverage. Our findings are consistent with firms substituting away from equity and towards more debt in the presence of higher book-tax conformity.

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Financial reporting, tax costs, and book-tax conformity

Cited by 156 publications

References 17 publications

A review of tax research

A review of tax research

Discussion of The Value of Financial Statement Verification in Debt Financing: Evidence from Private U.S. Firms

Book-tax conformity and capital structure

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