Showing papers in "Journal of The American Taxation Association in 2017"

An Examination of Reputational Costs and Tax Avoidance: Evidence from Firms with Valuable Consumer Brands

Abstract: We expect firms with the greatest exposure to reputational damage among consumers will engage in lower levels of tax avoidance to minimize unwanted scrutiny that could impair the firms' reputation. We identify a set of firms with valuable consumer reputation using Harris Interactive's EquiTrend survey, which surveys consumers about their perceptions of valuable and prominent brands. We find evidence in support of our hypothesis that firms with valuable brands will engage in less tax avoidance. Specifically, we find a positive and significant association between our measure of reputation and both the GAAP and cash effective tax rates (measured over one and three years). We find mixed evidence on whether there is a negative and significant association between reputation and the probability the firm is engaging in tax sheltering.

Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management

Abstract: We investigate the consequences of tax-related internal control material weaknesses (ICMWs) for financial reporting. We hypothesize that the presence of ineffective controls over the tax function makes earnings management through the income tax accrual (both income increasing and income decreasing) easier to implement relative to firms with effective controls. We also predict that the remediation of tax-related ICMWs has the effect of constraining earnings management through the tax accrual. The results provide support for our predictions. We also find that last chance earnings management via tax-related ICMWs is concentrated in the early years of our sample, during the initial SOX implementation period. Our results suggest that tax-related ICMWs were initially associated with greater tax-expense management but that SOX internal control assessments subsequently improved the quality of financial reporting by reducing opportunities for tax-expense management.

Equity Compensation and Tax Avoidance: Disentangling Managerial Incentives from Tax Benefits and Reexamining the Effect of Shareholder Rights

Abstract: Much empirical evidence is consistent with properly incentivized executives engaging in more tax avoidance. However, other studies provide evidence consistent with tax avoidance facilitat...

Are Socially Responsible Firms Less Likely to Expatriate? An Examination of Corporate Inversions

Abstract: This study examines whether corporate social responsibility (CSR) is related to the likelihood of corporate inversions, a legal tax-planning strategy. We use a full sample to test stakeholder theory and a risk management view of CSR. We find that firms with higher CSR performance are less likely to expatriate compared to firms with lower CSR performance. Although equity investors react positively to inversion announcements, we find that the reaction is less positive for firms with higher CSR ratings. These results are consistent with stakeholder theory. We do not find evidence that inversion firms experience significant improvements in operating performance after inversion. Overall, this study improves our understanding of the role of CSR in corporate expatriation decisions and has practical implications for a firm's stakeholders. Data Availability: Data are available from sources identified in the paper.

Does Schedule UTP Have Uniform Long-Run Effects on Corporate Tax Planning?

Abstract: This study investigates the effects of the Internal Revenue Service requiring confidential Schedule UTP disclosures on corporate tax planning over the period from 2008 to 2013 We make th

Taxable Income and Firm Risk

Abstract: We examine whether estimated taxable income provides incremental information about firms' operating risk. We develop taxable income-based measures that should be useful in assessing risk in a simple earnings predictability model. In our empirical tests these taxable income-based measures explain cross-sectional variation in the predictability and variability of future pre-tax financial performance. Further, these measures are associated with predictable variation in market-based measures of firm risk. Our findings shed light on how accounting information—specifically, book income and tax income—impacts investors' assessment of firm risk as well as improving our understanding of the extent and nature of information contained in estimated taxable income.

Income Statement Reporting Discretion Allowed by FIN 48: Interest and Penalty Expense Classification

Abstract: Financial Accounting Standards Board Interpretation No. 48 (FIN 48, FASB 2006) allows discretion regarding the income statement classification of interest and penalty expenses for unrecog...

The Market Valuation of the Permanent Book-to-Tax Differences Generated by Stock-Based Compensation Awards

Abstract: We examine the market valuation of the annual change in the additional paid-in capital (APIC) tax pool, a financial statement account that captures the permanent book-to-tax differences related to stock-based compensation awards. Evidence from prior compensation studies demonstrates that the tax deduction from the settlement of stock-based awards, rather than the recorded book expense, is the true economic cost of the awards. If this is true, then the APIC tax pool should be negatively related to firm value. Conversely, previous tax avoidance research suggests that this method of tax avoidance should be positively associated with firm value since it reduces cash tax payments. Using hand-collected data, we document a negative relation between the change in the APIC tax pool and cumulative abnormal returns surrounding the 10-K filing date. This result is consistent with the notion that investors use a tax-related financial statement account (i.e., the APIC tax pool) to incorporate the true economi...