American Taxation Association

JATA abstracts - Spring 2008

JATA - Spring 2008

Volume 30, No. 1

The Pricing of Realized Tax Benefits from NOL Carryforwards: Effect of Income Statement Presentation
T. J. Atwood and J. Kenneth Reynolds

Taxes and Asset Prices: The Case of Thoroughbreds
Kimberly G. Key

The Impact of Tax Status on the Relation between Employee Stock Options and Debt
Jagadison K. Aier and Jared A. Moore

Tax-Induced Trading around the Taxpayer Relief Act of 1997
Benjamin C. Ayers, Oliver Zhen Li, and John R. Robinson

Resisting Framing Effects: The Importance of Prior Attitude on Estate Tax Preferences
Darius J. Fatemi, D. John Hasseldine, and Peggy A. Hite


The Pricing of Realized Tax Benefits from NOL Carryforwards: Effect of Income Statement Presentation

T. J. Atwood and J. Kenneth Reynolds

Abstract

We examine the pricing of realized tax benefits from net operating loss (NOL) carryforwards across income statement presentations. During the period 1987 through 1992, firms adopting SFAS No. 96 reported these tax benefits as part of income before extraordinary items (via a reduced provision for income tax expense), while non-adopting firms reported these benefits as extraordinary income items under APB No. 11. We provide evidence that NOL tax benefits were priced rationally when reported as extraordinary income items under APB No. 11; however, NOL tax benefits were overpriced, relative to their one-year-ahead persistence, when included in income before extraordinary items under SFAS No. 96. Our results suggest that the rational pricing of income tax information is affected by its presentation in the income statement, despite the clear reporting of sufficient additional details in the footnotes. Our findings provide support for the Financial Accounting Standards Board's tentative decision to report income taxes in a separate section of the income statement. ©2008 American Accounting Association   Top


Taxes and Asset Prices: The Case of Thoroughbreds

Kimberly G. Key

Abstract

This study examines the thoroughbred auction market in order to assess the effect of taxes on asset prices. Yearlings purchased from 2002 to 2004 are eligible for bonus depreciation, and the price of the yearlings is predicted to be bid up during this period. The research design employs pricing models that have been published in economics and agri-business academic journals. These models control for such factors as yearling lineage, gender, and month foaled. Thoroughbreds are sold annually, and much of the data set is constructed using auction market sale catalog information. Consistent with the prediction, yearling prices are higher in the bonus period than in other periods. A control group of broodmares, which are not eligible for bonus depreciation, does not exhibit the same time period price differential. ©2008 American Accounting Association    Top


The Impact of Tax Status on the Relation between Employee Stock Options and Debt

Jagadison K. Aier and Jared A. Moore

Abstract

This study extends prior research on the tax-motivated substitution of employee stock options (ESOs) for debt by providing evidence on the manner in which the tax status of the firm and ESOs interact to influence debt policy. Using tobit regression and a sample of 13,345 firm-year observations over the period 1993–2004, we find that firms whose expected marginal tax rates are likely to be affected by non-debt tax shields (i.e., tax-sensitive firms) substitute ESOs for debt. In contrast, we find no association between debt and ESOs for firms that are likely able to fully utilize all available tax shields without affecting their expected marginal tax rates due to their high level of profitability for tax purposes (i.e., tax-insatiable firms). These results suggest that tax status impacts the association between debt and ESOs such that the two tax shields are not substitutes for all groups of firms across tax status categories. ©2008 American Accounting Association   Top


Tax-Induced Trading around the Taxpayer Relief Act of 1997

Benjamin C. Ayers, Oliver Zhen Li, and John R. Robinson

Abstract

We examine investor trading around the passage of the Taxpayer Relief Act of 1997 (TRA97), which reduced the capital gains tax rate from 28 percent to 20 percent. We provide evidence that individual investors increase their demand for equity shares on the announcement day of TRA97, consistent with the capitalization of capital gains taxes. On the effective day of TRA97, we find that individual investors increase the supply of equity shares with accrued gains, consistent with the lock-in effect of capital gains taxes. Regression results suggest that the demand-side effect associated with tax capitalization is a more powerful effect on abnormal trading than the supply-side effect associated with lock-in for the median stock trading around TRA97. Overall, our results suggest that capital gains taxes influence both the demand and supply for equity by tax-sensitive investors and that the effect on demand is more pronounced than the effect on supply. ©2008 American Accounting Association  Top


Resisting Framing Effects: The Importance of Prior Attitude on Estate Tax Preferences

Darius J. Fatemi, D. John Hasseldine, and Peggy A. Hite

Abstract

Understanding tax preferences toward the estate tax could help resolve the continuing debate on whether the tax should be repealed. Gathering public opinion, however, is not a simple task as differing frames can alter the solicited preferences. For example, the framing literature has shown that equivalent but countervailing frames can produce dissimilar responses. That is, providing positive descriptors of an attribute tends to lead to a more favorable evaluative response than does using negative descriptors (Levin et al. 1998). In contrast, the resistance literature has found that when respondents possess a prior counter attitude that conflicts with the descriptors, exposure to the descriptors can strengthen the original counter attitude. The estate tax, a contentious issue that is typically viewed negatively by taxpayers, provides an issue in which predictions from framing and resistance literatures are in direct contrast. Our study demonstrates that prior counter attitude reverses the expected framing effects. In sum, when respondents do not initially approve of an estate tax, favorable frames lead to more negative responses than do unfavorable frames. ©2008 American Accounting Association   Top

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