Terry Shevlin
ATA Doctoral Consortium
February 2015
Scholes and Wolfson* developed in response to
Do taxes matter? Myers (1984)
If not, why not?
If so, how much?
(Maydew’s classic chicken slides)
* Scholes: finance prof - Nobel prize winner for BSOPM
* Wolfson: super-smart acctg prof who left academia to make money in late 80s.
2
Overview - Scholes and Wolfson (1992)
Framework from SW: 3 central themes
All parties
e.g., compensation
Matsunaga, Shevlin and Shores 1992,
raising capital
Miller 1977,
Collins and Shackelford 1992
M&A Erickson 1998
All taxes - explicit and implicit
Do prices reflect tax treatment?
All costs
Financial reporting, agency costs , transaction costs
3
Tax and Nontax Tradeoffs
Taxes cannot be minimized without affecting other organizational goals
Taxes are not a cost that taxpayers inevitably avoid
Effects of financial reporting well studied
Quantification of nontax costs has progressed slowly
4
Shackelford and Shevlin JAE 2001: Future Directions
More links to managerial accounting
Governance structure, management compensation and links to tax planning **********
Organizational form (decentralized vs centralized)
Agency conflicts with tax planning ********
Accounting for income taxes and links to tax planning ********
Do firms manage effective tax rates? **********
What does this mean?
What determines firms’ tax-planning aggressiveness? *********
5
Current:
Four big areas today, two revolving around tax avoidance
1. Determinants of tax avoidance
Family firms, exec compensation, private vs public, institutional ownership, corporate governance, manager fixed effects, religious, geneder,. ….
BUT basically examining cross-sectional variation in firms propensity to engage in more or less tax avoidance or tax planning and immediately you see we are really talking about the concept of effective tax planning….from
SW. Thus the framework can help you think about the issues
But area is saturated....
6
2. Consequences of tax avoidance (at the corporate level)
On firm value
Price level regressions
Long window return regressions
Short window announcement studies
On cost of equity
Using implied cost of equity
On cost of debt
All these studies examine effects of cash tax savings vs nontax costs (mostly agency related) which are an important element in the SW framework
7
3. Multinational taxation
Effects of US Worldwide tax system on US multinationals
Investment location and repatriation decisions
Income shifting
Inversions
Locked out earnings/trapped cash
Agency problems
8
4. Accounting for income taxes and effects of financial reporting (grew out of the book-tax trade-off literature)
Disclosure: temporary vs permanent differences
Valuation allowance
PRE APB 23
Effects of financial reporting on real decisions
FIN 48
Book-tax conformity
9
Real effects of tax and accounting, with tax policy motivations
International: BEPS
Intangibles
New data, new tax laws (exploit new data)
Identification (new requirement: pooled c/s might not be enough anymore)
10
Collaboration:
Across disciplines: accounting, economics, finance
Across geography: North America, Europe, Asia
The role of financial instruments...
11
Also be prepared to answer the basic question
Why would not taxes matter here (Asked numerous ways: is it not obvious...., where is the tension... So think about the frictions and restrictions that might lead us to not observing a predicted result)
12
Not as explicitly referenced now in studies (might have been over-referenced in 90’s and early 2000’s to give legitimacy to tax papers) but I think every student in this room would be well served to read the Shackelford and Shevlin 2001 JAE review piece
(and the HH JAE 2010 piece) and time permitting to read the SW textbook to become very familiar with the concepts and ideas..
13