American Taxation Association

JATA abstracts - 2003 Supplement

JATA - 2003 Supplement

Volume 25 supplement

The Effect of State Income Tax Apportionment and Tax Incentives on New Capital Expenditures
Sanjay Gupta and Mary Ann Hofmann

The Effects of Source Credibility on Tax Professional Judgment in Consulting Engagements
Raquel Meyer Alexander

Valuation of a Firm with a Tax Loss Carryover
Anja De Waegenaere, Richard C. Sansing and Jacco L. Wielhouwer

Firm Valuation Effects of the Expatriation of U.S. Corporations to Tax-Haven Countries
C. Bryan Cloyd, Lillian F. Mills and Connie D. Weaver


The Effect of State Income Tax Apportionment and Tax Incentives on New Capital Expenditures

Sanjay Gupta and Mary Ann Hofmann

Abstract

This study examines how variations in states' corporate income tax regimes affect new capital investment by business. Using U.S. state-aggregated data from 1983 to 1996, we find in pooled and fixed-effects regressions that new capital expenditures by corporations in the manufacturing sector are decreasing in the income tax burden on property (measured as the product of the statutory tax rate and the property factor weight), and increasing at a decreasing rate in investment-related tax incentives. The effect of the income tax burden on property is more pronounced for states mandating unitary taxation or the throwback rule. Triangulating our empirical findings with prior analytical and simulation studies suggests the following hierarchy for the relative importance of major attributes of state corporate income tax regimes: the unitary or throwback requirement is most influential on incremental capital investment, followed by apportionment weights and tax rates, and, finally, investment-related incentives.  Top


The Effects of Source Credibility on Tax Professional Judgment in Consulting Engagements

Raquel Meyer Alexander

Abstract

Tax consulting services are an important growth area for professional accounting firms. However, regulatory and governmental bodies are concerned that consulting service sales may impair professional accountants' judgment. Using source credibility theory, this study examines whether research and review processes in taxconsulting engagements differ when two key factors are varied: source of the planning idea and engagement type. Big 4 seniors and managers reviewed a tax memorandum in which information source (prepared by National Tax Office or local staff member) and engagement type (initiated by a client or by the firm) are manipulated in a 2 × 2 design. Engagement managers performed the most thorough reviews when involved in a firm-initiated consulting engagement relying upon a National Tax Office memorandum. Thus, the results of this study are inconsistent with the presumption that objectivity is impaired in highly incentivized consulting engagements.  Top


Valuation of a Firm with a Tax Loss Carryover

Anja De Waegenaere, Richard C. Sansing and Jacco L. Wielhouwer

Abstract

This paper examines the effects of a tax loss carryover on the market and book values of a firm's assets. The loss carryover has a direct effect on market value by sheltering future income from tax, and a direct effect on book value due to the recognition of a deferred tax asset. The failure to discount the deferred tax asset to its present value causes the market-to-book ratio of the deferred tax asset to be less than 1. However, positive skewness in the distribution of future taxable income can cause the market-to-book ratio to exceed 1 because the market value depends on the mean level of future tax benefits, while the book value is based on the median level of future tax benefits. The loss carryover also has an indirect effect on firm value in that it induces the firm to exercise its real option to invest early. This reduces firm value before investment takes place and decreases the market-to-book ratio of physical assets after investment takes place.  Top


Firm Valuation Effects of the Expatriation of U.S. Corporations to Tax-Haven Countries

C. Bryan Cloyd, Lillian F. Mills and Connie D. Weaver

Abstract

U.S. corporations that reorganize in tax-haven countries claim to save many millions of dollars in future U.S. corporate income taxes. However, because these "inversion" transactions may involve significant nontax costs, it is not obvious how they affect share value. We use Monte Carlo sampling to analyze the statistical significance of each inverting firm's abnormal returns around the date that it initially announced its intentions and board of director approval of an inversion transaction. We find that five of the 20 single-company expatriations in our analysis have significant negative announcement period returns and only two show significant positive returns. The remaining 13 inversions show no statistically significant market reaction in the announcement period. The average return in the announcement period across all 20 firms is negative, but not significantly different from zero. Overall, we do not detect obvious shareholder benefits from expatriations.  Top

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