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American Taxation Association |
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American Taxation Association |
JATA - 2004 SupplementVolume 26 supplement Tax Professional Decision Biases: The Effects of Initial Beliefs and Client Preference Decomposing Changes in Deferred Tax Assets and Liabilities to Isolate Earnings Management Activities Germany's Repeal of the Corporate Capital Gains Tax: The Equity Market Response Competitive, Political, and Economic Factors Influencing State Tax Policy Changes A Discussion with Reviewers: Insights from the Midyear ATA Meetings Reviewing the Review Process Tax Professional Decision Biases: The Effects of Initial Beliefs and Client Preference Jennifer B. Kahle and Richard A. White Abstract While many studies have inferred confirmation bias in a tax decision-making context, the tax professional's initial belief has usually been the same as the client-preferred position. The objective of this study was to disentangle the effects of evidence direction (confirming or disconfirming evidence) and client preference on tax professionals' belief revisions following the examination of additional evidence. In a repeated-measures design, participants recorded an initial belief and a revised belief in response to two independent fact scenarios. Consistent with research related to auditors, but inconsistent with the psychology literature, the results of this study indicate that tax professionals react in a manner opposite to the predictions of confirmation bias, particularly when the evidence reviewed is counter to the client's wishes. Further examination reveals that the client preference has a more substantial effect on tax professional judgments when the evidence being reviewed confirms the professionals' initial beliefs than when it disconfirms their initial beliefs. Top Decomposing Changes in Deferred Tax Assets and Liabilities to Isolate Earnings Management Activities John D. Phillips, Morton Pincus, Sonja Olhoft Rego and Huishan Wan Abstract This paper provides evidence on the types of accounts that reveal earnings management activities. We build on Burgstahler and Dichev's (1997) evidence of earnings management to avoid an earnings decline and Phillips et al.'s (2003) findings that deferred tax expense (DTE) can be used to detect such earnings management. In particular, we investigate the relation between changes in annual earnings and changes in deferred tax asset and liability components using data hand-collected from firms' income tax footnote disclosures. Our evidence indicates that changes in the net deferred tax liability (DTL) component related to revenue and expense accruals and reserves can be used to detect earnings management to avoid an earnings decline. In addition, we build on Joos et al.'s (2003) results and partition our sample into firm-years with positive and negative changes in net DTLs and repeat our analyses. In contrast to the Joos et al. (2003) finding that DTE can be used to detect earnings management only for firm-years in which DTE is negative, we find that both subsamples reflect earnings management of revenue and expense accruals and reserves to report earnings increases. Top Germany's Repeal of the Corporate Capital Gains Tax: The Equity Market Response Courtney H. Edwards, Mark H. Lang, Edward L. Maydew and Douglas A. Shackelford Abstract In late 1999, the German government made a surprise announcement that it would repeal the large and long-standing capital gains tax on sales of corporate crossholdings effective in 2002. The repeal has been hailed as a revolutionary step toward breaking up the extensive web of crossholdings among German companies. The lock-in effect from the large corporate capital gains tax was said to act as a barrier to efficient acquisition and divestiture of German firms and divisions. Many observers predicted that once the lock-in effect was removed, Germany would experience a flurry of acquisition and divestiture activity. Several other industrialized countries were poised to follow suit, with similar proposals pending in France, Japan, and the United Kingdom. This paper provides evidence of the economic impact of the repeal by examining its effect on the market values of German firms. While event studies of tax legislation can be difficult, our study is aided by the fact that the repeal was both a surprise and was announced separately from other tax reform proposals. In addition, we provide cross-sectional evidence on the economic magnitude of the repeal, assess the likely beneficiaries from the repeal, and predict which sectors are most likely to experience a surge in acquisition and divestiture activity following the repeal. Our results suggest that the economic effects are highly concentrated. We find a positive association between firms' event period abnormal returns and the extent of their crossholdings, consistent with taxes acting as a barrier to efficient allocation of ownership. However, the reaction is limited to the six largest banks and insurers and their extensive minority holdings in industrial firms. These six large firms have a combined market capitalization equal to 22 percent of all 394 firms in this study. We also find evidence of a positive stock price response to the announcement for industrial companies held by these financial firms, consistent with shareholders in those firms benefiting from the likely reduction in investor-level tax burdens and expected increased efficiency following the tax law change. Top Competitive, Political, and Economic Factors Influencing State Tax Policy Changes Thomas C. Omer and Marjorie K. Shelley Abstract We investigate state tax competition for capital and jobs, focusing on the business income apportionment formula. We look for associations between states’ apportionment formula changes and competing states’ changes using event history analysis. We test for a positive association between our tax competition proxies and apportionment formula change while controlling for economic, political, and regional diffusion influences on tax policy. Our results support the hypothesized positive association. We conclude that state governments compete for capital and jobs and respond to their competitors’ tax policy decisions with conforming policy changes. Our study contributes to the empirical tax literature on state and local tax policy. Top A Discussion with Reviewers: Insights from the Midyear ATA Meetings Thomas C. Omer, Susan L. Porter, Robert J. Yetman, Anne M. Magro, Lillian F. Mills, Richard C. Sansing and Benjamin C. Ayers Abstract This article summarizes and elaborates on an ATA panel session at the 2004 Midyear Meeting in Denver entitled, "How to Constructively Review a Journal Submission." The session was organized to elicit discussion on the review process from a panel of experienced faculty nominated by editors for consistently providing constructive reviews. However, because the panelists are authors as well as reviewers, the perspectives of authors and reviewers were both expressed during the session. This duality provides insights that may be useful for both authors and reviewers. Top Steven J. Kachelmeier Abstract This commentary offers some "big picture" reactions to points raised by the American Taxation Association Panel on academic journal reviewing (Omer et al. 2004), along with advice for both reviewers and authors. Comments are integrated with recent contributions from the supporting literature on the journal review process. Top |