terry shevlin ata doctoral consortium february 2013
TRANSCRIPT
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Terry Shevlin
ATA Doctoral ConsortiumFebruary 2013
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Overview - Background Comments
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.
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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
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Overview - Scholes and Wolfson (1992)
Not a new theory
Is positive rather than normative
No paper really challenges the framework
Maintained assumption and used to structure tests
Relatively young field – when Doug and I wrote the JAE review on 2000.Thus documentationNot integrated empirical development
Changes in tax laws and data availability stimulate research questions AND still do.
See Hanlon and Heitzman JAE 2010 for more recent review.
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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
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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?
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Two big areas today, both revolving around tax avoidance
1. Determinants: family, exec compensation, private vs public, institutional ownership, corporate governance. ….
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
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2. Consequences of tax avoidance (at the corporate level)
On firm valuePrice level regressionsLong window return regressionsShort window announcement studies
On cost of equityUsing 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
Desai and Dharmapala papers on agency costs but basically is this an important nontax cost of tax avoidance influencing both propensity to engage in and consequences thereof.
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Golden Oldies
Asset prices
Location decisions – role of financial accounting vs cash tax savings
Effects of financial accounting – FIN 48 studies
As you sit through various research presentations at this conference think about how the SW framework would help frame or help you think about the issue.
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So SW still relevant
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..
Questions, discussion?
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Why Did the Chicken Cross the Road?
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Because Taxes Were Lower on the Other Side
Low Taxes High Taxes
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Why Didn’t All the Chickens Cross the Road?
Low Taxes High Taxes
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Crossing the Road Can Be Costly
Low Tax High Tax