Leverage and Dividend Irrelevancy Under Corporate and Personal Taxation

DeAngelo, Harry; Masulis, Ronald W.

doi:10.1111/j.1540-6261.1980.tb02176.x

Cited by 110 publications

(53 citation statements)

References 6 publications

(5 reference statements)

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“…They find that firms appear to trade-off interest deductions with non-debt tax shields (tax shelters) as predicted by DeAngelo and Masulis (1980). By extension, I predict that the probability that a firm will engage in one particular shelter depends on the number of other levers available to the tax planner.…”

Section: Opportunities To Report Aggressivelymentioning

confidence: 93%

“…Following logic developed by DeAngelo and Masulis (1980), Graham and Tucker (2006) posit that tax shelters serve as non-debt tax shields and substitute for the use of debt. Consistent with their hypothesis, Graham and Tucker (2006) find that compared to firms with similar pre-shelter debt ratios, the debt ratios of their sample of tax shelter participants fall by about 8%.…”

Section: Archival Studies Of Corporate Tax Avoidancementioning

confidence: 99%

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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: Opportunities To Report Aggressivelymentioning

confidence: 93%

Section: Archival Studies Of Corporate Tax Avoidancementioning

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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“…A number of studies depict capital structure as a dependent variable which is affected by various independent variables, such as profitability, growth opportunities, debt and non-debt tax shield, firm size, tangibility, ownership concentration and many others (DeAngelo & Masulis, 1980;Harris & Raviv, 1991;Jensen & Meckling, 1976;Myers, 1984;Qureshi, 2009;Sheikh & Wang, 2011). Moreover, various researches conducted on the effect of diversification on capital structure and performance evolved different schools of thought leading to the emergence of theories such as Coinsurance Theory (CT), Transaction Cost Theory (TCT), and Agency Theory (AT).…”

Section: Introductionmentioning

confidence: 99%

Does Diversification Affect Capital Structure and Profitability in Pakistan?

Qureshi¹,

Akhtar²,

Imdadullah³

2012

ASS

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Diversification has become a common strategy of corporate risk management along with availing other potential benefits. The intent of this study is to identify and analyze the nature of relationship that exists between diversification and capital structure as well as profitability in Pakistan. For this purpose we use the 10 years ' (2000-2009) data of all the companies of chemical and food sector listed at the Karachi Stock Exchange (KSE). We find that the diversified firms are more profitable. Using independent variables of firm size, growth and tangibility the results show that whenever significant, the relationship is associated with greater amount of debt held by the firms.

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“…Such a sluggish response is contradicted by the empirical results of Fama (1981) and Hendershot and Hu (1980). In this sub-section, the capital structure invariance assumption is replaced with the empirically-based relation that both p(it) and iC-it) move one-for-one with inf1ation.-.J Capital structure invariance may not hold in equilibrium because of large fixed transactions costs, a lack of a complete set of markets (Taggart, 1980), or restrictions on the type of debt securities that may be issued (DeAngelo and Masulis, 1980). The results with dp(ic)/dJt = 1 = di(it)/dic are presented in Table II, and are calculated for leverage ratios of .25 and .75 and for both -13-definitions of user costs.-!…”

Section: B Debt and Personal Tax Ratesmentioning

confidence: 99%

Hidden Stimuli to Capital Formation: Debt and the Incomplete Adjustment of Financial Returns

Chirinko

King²

1985

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There is a common belief that the disappointing economic performance in the 1970s can be attributed in good part to the interaction of tax rules, inflation, and capital formation. In this paper, we reassess the relationships between inflation, the tax code, and investment incentives because previous results are based on a number of tenuous assumptions whose impact has not been fully appreciated. We also question the appropriateness of the conventional user cost formulation, and derive an alternative measure taking explicit account of the role of debt --acquisition, retirement, and net-of-tax interest payments -and the equityholders' ownership of the firm. Our numerical results show that previously reported disincentives for acquiring capital goods in general and against longer-lived capital in particular are attenuated, and in a number of cases reversed, under various sets of assumptions. Differences in results stemming from the conventional and modified user costs are highlighted, and are illustrated by a comparison of the U.S. Treasury's tax reform proposals under the two formulations. Robert S. ChirinkoStephen Did the high inflation of the l9TOs depress incentives for businesses to invest in plant and equipment? This question has been investigated in a number of studies utilizing variants of the conventional neoclassical user cost of capital, and a general conclusion emerging from this work, shared by policyinakers (White House, 1981), is that the interaction of inflation with the existing tax code has reduced firms' incentives to acquire capital (Feldstein, 1982, Kopcke, 1981. Inflation affects investment decisions by causing variations in the value of tax depreciation deductions, the firm's discount rate, and the cost of debt (as we shall see, the latter two channels are not always identical)..i' In this paper, we reassess the relationship between inflation and investment incentives because previous results are based on a number of tenuous assumptions whose impact has not been fully appreciated. These include the adjustment of financial returns to inflation, the appropriateness of the capital structure invariance assumption, and the role of personal taxes. Calculations with a range of relevant parameters indicate that previously reported disincentives for acquiring capital goods are attenuated, and in a number of cases reversed, under various configurations of these key assumptions. Our simulations highlight that in an inflationary environment, incentives for acquiring longer-lived capital are depressed relatively more than those for shorter-lived assets only under a rather restrictive set of assumptions. Furthermore, we show that the results are extremely sensitive to the exact values of underlying parameters, which are unlikely to be known with any accuracy.-2-In conventional definitions of the user cost (Hall and Jorgenson, 1967)., the firm's discount rate is defined by the opportunity cost of funds, a weighted average of the costs of equity and debt (including tax considerations) with weights ...

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Leverage and Dividend Irrelevancy Under Corporate and Personal Taxation

Cited by 110 publications

References 6 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

Does Diversification Affect Capital Structure and Profitability in Pakistan?

Hidden Stimuli to Capital Formation: Debt and the Incomplete Adjustment of Financial Returns

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