Advertisement

International Tax and Public Finance

, Volume 18, Issue 4, pp 461–494 | Cite as

Financial reporting, tax, and real decisions: toward a unifying framework

  • Douglas A. Shackelford
  • Joel SlemrodEmail author
  • James M. Sallee
Article

Abstract

This paper provides a first step toward joint evaluation of taxation and financial reporting in the standard economic analyses of corporate behavior. It develops a framework that formalizes the idea that the attractiveness of some investment decisions is enhanced because they provide managers with discretion over the timing of taxable income and/or book income. It then examines from this perspective several current examples of tax and accounting issues.

Keywords

Taxation Accounting Corporate behavior Discretion 

JEL Classification

H25 N41 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Armstrong, C., Guay, W., & Weber, J. (2010, forthcoming). The role of information and financial reporting in corporate governance and contracting. Journal of Accounting and Economics. doi: 10.1016/j.jacceco.2010.10.001. Google Scholar
  2. Auerbach, A. (1986). The dynamic effect of tax loss asymmetries. Review of Economic Studies, 53, 205–225. CrossRefGoogle Scholar
  3. Barth, M., Beaver, W., & Landsman, W. (1998). Relative valuation roles of equity book value and net income as a function of financial health. Journal of Accounting & Economics, 25, 1–34. CrossRefGoogle Scholar
  4. Beyer, A., Cohen, D., Lys, T., & Walther, B. (2010, forthcoming). The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics. doi: 10.1016/j.jacceco.2010.10.003. Google Scholar
  5. Blouin, J., & Krull, L. (2009). Bringing it home: a study of the incentives surrounding the repatriation of foreign earnings under the American jobs creation act of 2004. Journal of Accounting Research, 47(4), 1027–1059. CrossRefGoogle Scholar
  6. Blouin, J., & Tuna, I. (2006). Tax contingencies: cushioning the blow to earnings? Working paper, Wharton School at the University of Pennsylvania. Google Scholar
  7. Blouin, J., Gleason, C., Mills, L., & Sikes, S. (2007). Changes in tax reserves in anticipation of FIN 48. Working paper, University of Pennsylvania. Google Scholar
  8. Blouin, J., Krull, L., & Robinson, L. (2009). Is US multinational intra-firm dividend policy influenced by capital market incentives? Working paper, University of Pennsylvania. Google Scholar
  9. Chen, Q., Mittendorf, B., & Zhang, Y. (2007). Endogenous accounting discretion and its implications for bias and information content of accounting reports. Working paper, Duke University. Google Scholar
  10. Collins, J., Hand, J., & Shackelford, D. (2001). Valuing deferral: the effect of permanently reinvested foreign earnings on stock prices. In J. Hines (Ed.), International taxation and multinational activity (pp. 143–166). Chicago: University of Chicago Press. Google Scholar
  11. Crocker, K., & Slemrod, J. (2005). Corporate tax evasion with agency costs. Journal of Public Economics, 89(9–10), 1593–1610. CrossRefGoogle Scholar
  12. Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: a review of the proxies, their determinants and their consequences. Journal of Accounting & Economics, 50(2–3), 344–401. CrossRefGoogle Scholar
  13. Dhaliwal, D., Frankel, M., & Trezevant, R. (1994). The taxable and book income motivations for a LIFO layer liquidation. Journal of Accounting Research, 32(2), 278–289. CrossRefGoogle Scholar
  14. Dhaliwal, D., Gleason, C., & Mills, L. (2004). Last-chance earnings management: using the tax expense to meet analysts’ forecasts. Contemporary Accounting Research, 21(2), 431–460. CrossRefGoogle Scholar
  15. Dharmapala, D., Foley, C., & Forbes, K. (2009). Watch what I do, not what I say: the unintended consequences of the homeland investment act. NBER Working paper No. 15023. Google Scholar
  16. Drucker, J. (2009). Titans vow overseas tax fight: Obama Administration plan would hit biggest companies hardest. Wall Street Journal, April 22. Google Scholar
  17. Dyreng, S. (2009). The cost of private debt covenant violation. Working paper, Duke University. Google Scholar
  18. Engel, E., Erickson, M., & Maydew, E. (1999). Debt-equity hybrid securities. Journal of Accounting Research, 37(2), 249–274. CrossRefGoogle Scholar
  19. Erickson, M., Hanlon, M., & Maydew, E. (2004). How much will firms pay for earnings that do not exist? Evidence of taxes paid on allegedly fraudulent earnings. The Accounting Review, 79(2), 387–408. CrossRefGoogle Scholar
  20. Faulkender, M., & Petersen, M. (2009). Investment and capital constraints: repatriations under the American jobs creation act. Working paper, Northwestern University. Google Scholar
  21. Fischer, P., & Verrecchia, R. (2000). Reporting bias. The Accounting Review, 75(2), 229–245. CrossRefGoogle Scholar
  22. Francis, J., & Reiter, S. (1987). Determinants of corporate pension funding strategy. Journal of Accounting and Research, 9(1), 35–59. Google Scholar
  23. Frankel, M., & Trezevant, R. (1994). The year-end LIFO inventory purchasing decision: an empirical test. The Accounting Review, 69(2), 382–398. Google Scholar
  24. Frischmann, P., Shevlin, T., & Wilson, R. (2008). Economic consequences of increasing the conformity in accounting for uncertain tax benefits. Journal of Accounting & Economics, 46(2–3), 261–278. CrossRefGoogle Scholar
  25. Fullerton, D. (1984). Which effective tax rate? National Tax Journal, 37(1), 23–41. Google Scholar
  26. Graham, J. (1996). Debt and the marginal tax rate. Journal of Financial Economics, 41(1), 41–73. CrossRefGoogle Scholar
  27. Graham, J., & Mills, L. (2008). Using tax return data to simulate corporate marginal tax rates. Journal of Accounting & Economics, 46(2–3), 366–388. CrossRefGoogle Scholar
  28. Graham, J., Hanlon, M., & Shevlin, T. (2009). Real effects of accounting rules: evidence from multinational firms’ investment location and profit repatriation decisions. Working paper, Duke University. Google Scholar
  29. Graham, J., Raedy, J., & Shackelford, D. (2011). Research in accounting for income taxes. Working paper, University of North Carolina, Chapel Hill, NC. Google Scholar
  30. Hanlon, M. (2005). The persistence and pricing of earnings, accruals, and cash flows when firms have large book-tax differences. The Accounting Review, 80, 137–166. CrossRefGoogle Scholar
  31. Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting & Economics, 50(2–3), 127–178. CrossRefGoogle Scholar
  32. Hanlon, M., & Maydew, E. (2008). Book-tax conformity: implications for multinational firms. Working paper, University of Michigan, Ann Arbor, MI. Google Scholar
  33. Hanlon, M., & Shevlin, T. (2005). Book-tax conformity for corporate income: an introduction to the issues. In J. Poterba (Ed.), Tax policy and the economy 19 national bureau of economic research (pp. 101–134). Cambridge: MIT Press. Google Scholar
  34. Hanlon, M., Laplante, S., & Shevlin, T. (2005). Evidence from the possible information loss of conforming book income and taxable income. The Journal of Law & Economics, 48(92), 407–442. CrossRefGoogle Scholar
  35. Healy, P. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting & Economics, 7, 85–107. CrossRefGoogle Scholar
  36. Healy, P., & Wahlen, J. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365–383. CrossRefGoogle Scholar
  37. Hodder, L., McAnally, M., & Weaver, C. (2003). The influence of tax and nontax factors on banks’ choice of organizational form. The Accounting Review, 78(1), 297–325. CrossRefGoogle Scholar
  38. Hunt, A., Moyer, S., & Shevlin, T. (1996). Managing interacting accounting measures to meet multiple objectives: a study of LIFO firms. Journal of Accounting & Economics, 21(3), 339–374. CrossRefGoogle Scholar
  39. Kothari, S. (2001). Capital markets research in accounting. Journal of Accounting & Economics, 31(1–3), 105–231. CrossRefGoogle Scholar
  40. Krull, L. (2004). Permanently reinvested foreign earnings, taxes and earnings management. The Accounting Review, 79(3), 745–767. CrossRefGoogle Scholar
  41. Lev, B., & Nissim, D. (2004). Taxable income, future earnings, and equity values. The Accounting Review, 79(4), 1039–1074. CrossRefGoogle Scholar
  42. Matsunaga, S., Shevlin, T., & Shores, D. (1992). Disqualifying dispositions of incentive stock options: tax benefits versus financial reporting costs. Journal of Accounting Research, 30, 37–76 (Supplement). CrossRefGoogle Scholar
  43. Maydew, E., Schipper, K., & Vincent, L. (1999). The impact of taxes on the choice of divestiture method. Journal of Accounting & Economics, 28(2), 117–150. CrossRefGoogle Scholar
  44. Mills, L. (1998). Book-tax differences and Internal Revenue Service adjustments. Journal of Accounting Research, 36(2), 343–356. CrossRefGoogle Scholar
  45. Mills, L., Robinson, L., & Sansing, R. (2010). FIN 48 and tax compliance. The Accounting Review, 85(5), 1721–1742. CrossRefGoogle Scholar
  46. Neubig, T. (2006). Where’s the applause? Why most corporations prefer a lower rate. Tax Notes, 483. Google Scholar
  47. Raedy, J., Seidman, J., & Shackelford, D. (2010). Book-tax differences: which ones matter to equity investors? Working paper, University of North Carolina. Google Scholar
  48. Robinson, L. (2010). Do firms incur costs to avoid reducing pre-tax earnings? Evidence from the accounting for low-income housing tax credits. The Accounting Review, 85(2), 637–669. CrossRefGoogle Scholar
  49. Sankar, M. R., & Subramanyam, K. R. (2001). Reporting discretion and private information communication through earnings. Journal of Accounting Research, 39(2), 365–386. CrossRefGoogle Scholar
  50. Scholes, M., & Wolfson, M. (1992). Taxes and business strategy: a planning approach. Englewood Cliffs: Prentice-Hall. Google Scholar
  51. Shackelford, D., & Shevlin, T. (2001). Empirical research in accounting: a discussion. Journal of Accounting & Economics, 31(1–3), 321–387. CrossRefGoogle Scholar
  52. Slemrod, J. (2001). A general model of the behavioral response to taxation. International Tax and Public Finance, 79(3), 119–128. CrossRefGoogle Scholar
  53. Stocken, P., & Verrecchia, R. (2004). Financial reporting system choice and disclosure management. The Accounting Review, 79(4), 1181–1203. CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  • Douglas A. Shackelford
    • 1
  • Joel Slemrod
    • 2
    Email author
  • James M. Sallee
    • 3
  1. 1.University of North CarolinaChapel HillUSA
  2. 2.University of MichiganAnn ArborUSA
  3. 3.University of ChicagoChicagoUSA

Personalised recommendations