Ryan Comps

Cash Effective Tax Rate

"Import improvement--measure over long period. Also measure taxes as cash paid for taxes. Benefits--cash effective tax rates take into account the tax benefits of employee stock options (and other deferred expenses/benefits), also not affected by changes in estimate such as the valuation allowance or tax cushion. Cash taxes paid is also fairly easy to find.

Erickson and Maydew; 1998; TAR

"Q: Do implicit taxes exist? An examination of implicit taxes in high dividend yield stocks (preferred stocks and high yield common stocks) in the setting of reduction in corporate DRD. M: The existence and magnitude of implicit taxes was empirical question. It was difficult to disentangle tax effects from differences in risk. RD: Proposal to reduce corporate dividend received deduction from 70% to 50%. They compared return of high dividend yield securities (same risk) before and after the proposal. Tax benefit might decrease, thus drop the stock prices of high yield securities. R: Find that preferred stocks experienced a negative 1-percent abnormal return around the proposed reduction in the dividends received deduction. This suggests that preferred stocks bear implicit taxes as a result of the tax-preference given to corporate investors. Further, the price decline in documented in this paper indicates that reducing the dividends received deduction have adverse unintended consequences. Specifically, policy makers may be interested to know that decreasing the dividends received deduction will increase issuing firms' cost of capital. Put another way, our evidence indicates that at least part of the increased tax burden is shifted from corporate investors to corporate issuers of preferred stock by increasing the pretax return required to successfully issue preferred stock.

De Simone et al; 2014; RAST

"Q: To what extent does managers discretion affect the reserve for unrecognized tax benefits? M: The authors' setting (paper processing and black liquor as renewable fuel) enables them to get at the ""purer"" form of manager discretion--a topic of interest, especially to regulators. This is given the near identical nature of the transaction. RD: (1) The Taxable Group consists of five firms that claimed the most conservative (certain) tax position and treated the refunds as taxable income. (2) The Reserve Group consists of six firms that excluded the refunds from taxable income but accrued a full UTB reserve. This group took an aggressive (uncertain) tax reporting position but a conservative financial reporting position. (3) The Benefit Group consists of eight firms that excluded the refunds from taxable income and recognized some or all of the tax benefits from the exclusion in their financial statements. This group took aggressive tax and financial reporting positions. R: Firms who would stand to benefit from being aggressive were aggresive (that is, those with income to off set). The opposite is true of the others. Blockholders are more conservative. Having analysts gives certain incentives. Compensation/CEO also being a chariman seems to matter/induce aggressive behavoir. BT: In spite of the FASB's specific intent that FIN 48 would improve transparency and comparability in reporting for uncertain tax positions, the financial reporting of the refunds varies greatly in the authors' sample. They conclude that FIN 48 provides managers with sufficient latitude to reach dramatically different conclusions regarding the uncertainty of a tax position and the subsequent accrual of the UTB.

Kim et al; 2019; WP

"Q: What is the effect of foreign tax cuts on the competitive environment of U.S. Domestic Firms? M: Recent tax-law change (TCJA) - what will be the spillover effects of this law on foreign firms? This led to--how have foreign tax cuts affected the US firms? No empirical evidence on how declining foreign rates effect U.S. Domestic Firms. This led to--looking into competition. Predictions--Reductions in foreign country corporate tax rates lead to decreases in margins for U.S. domestic firms and increases in RD Expense, ad expense, capx and productivity. R: in line with the predictions. More pronounce effects when the there is low product differentiation. Also not present in multinational firms.

Problems with different measures of taxes. Cash ETR vs GAAP ETR, ETRs as a whole, Etc.

A limitation of all studies using ETR as the outcome variable is that ETRs only capture minimization of taxes, rather than the maximization of after-tax income.

Tax clienteles

Clienteles effects arise to the extent that investors with different marginal tax rates prefer to hold different portfolio considering tax effects.

Pretax return

Return of the security before adjusting taxes.

Dyreng et al; 2008; TAR

Q: (1) To what extent are some firms able to avoid taxes over periods as long as ten years? (2) How predictive are one-year tax rates for tax avoidance in the long run? M: Tax avoidance is a big deal over the last few years. Past studies have only looked at annual measures of tax avoidance. We do not know if it is a transitory construct. None use long term measures. Their newly created measure will be useful to future researchers and policy makers. RD: Cash ETR--cash taxes paid divided by pretax income minus special items (this is summed over many years). Improvements--they use a long-term measure and they use cash taxes. These get around problems when using GAAP ETR (it is based on annual data and includes current and deferred portions--moreover, even using current expense can be problematic given IRS rules). R: 10 year Cash ETR is more perisitant (is more associated with 1 year etrs) when it is lower than 20% and between 20 adn 40%.

Dhaliwal et al; 2004; CAR

Q: Are manipulations of income tax expense regularly used to achieve earnings targets? M: Chronology of financial statement preparation. Tax expense: an underexplored context for earnings management. There are opportunities for this type of management. Main Hypothesis--All else equal, changes in tax expense are negatively related to whether and by how much a firm's earnings absent tax expense management miss the firm's target earnings. R: The instance of a miss absent tax expese (interacted with the amount by which it would have been missed) is negatively associated with a decrease in year to date taxes from quarter 3 to quarter 4. BT: Firms use tax expense as a cookie jar reserve to manage earnings when other pretax accruals fail to achieve the target.

McGuire et al; 2014; TAR

Q: Are the agency costs inherent in Dual-Class Stock associated with the level of a firms' tax avoidance? M: Dyreng et al; 2008; TAR opened research into tax avoidance by looking at cash effective tax rates. They find significant variation in rates. Understanding of cross-sectional determinants so f tax avoidance is limited. This paper offers one potential determinant. RD: Dual Class Stock--Multiple classes of stock, each with equal claim to the cash flows of the company. However, the voting rights of the classes are not equivalent. Class with more votes is not typically traded publicly. Usually held by executives, help them maintain control (harder to do takeovers, etc.). Agency Conflict: because they have more votes, but less of a relative "stake in the game," managers may make choices that benefit them, but hurt other investors. Hypothesis--The difference between voting rights and cash flow rights is associated with lower levels of tax avoidance. For dual class firms, WEDGE is the difference between the voting rights and cash flow rights of a firm's insiders. Insider voting rights as total insider voting rights divided by total voting rights for all shareholders and insider cash flow rights as total insider cash flow rights divided by total cash flow rights for all shareholders. R: As the wedge increases (that is, as there are more insider voting rights to cash flow right) a firms ETR, effective and cash are higher. The results of this analysis suggest the lower levels of tax avoidance are likely a result of excess voting rights creating managerial entrenchment that allows managers to perform at a suboptimal level without the fear of job loss.

Hanlon; 2005; TAR

Q: Are the earnings of firms with large book-tax differences priced differently/have different levels of persistence? M: In the wake if accounting scandals, some people have suggested that BTDs might be incentive of poor performance. Hypotheses--(1) Pre-tax earnings persistence for firm-years with large negative or large positive book-tax differences is lower than pre-tax earnings persistence for firm-years with small book-tax differences. (2) The persistence of the accruals component of earnings for future earnings is lower for firm-years with large negative or large positive book-tax differences relative to firm-years with small book-tax differences. (3) The expectation of pre-tax earnings persistence reflected in stock prices for the accrual component of pre-tax earnings is consistent with the observed persistence of accruals for firm-years with relatively large book-tax differences. RD: high quintile and low quintile BTDs. R: Large positive/negative book-tax differences indicate that pre-tax financial reporting income and the earnings are less persistent. Accrual/cash flow is also less persistent. Investors view earnings to be less persistent when BTD is large. BT: Large BTD contains information content. And investors know it (at least for large positive BTD).

Scholes et al; 1990; RFS

Q: Can tax status explain a banks' investment and financing policies? M: Predictions--(1) decreases in municipal bond holdings during calendar quarters in which tax legislation discouraged such investments, and an increases in holdings during calendar quarters in which legislative developments encouraged such investments. (2) Since capital notes give rise to interest that is tax deductible, whereas common and preferred stock do not, we would expect banks with relatively high marginal tax rates to issue capital notes, and those with low marginal tax rates to issue common and preferred stock. R: Findings are in line with changes in laws changing the levels of muni bonds held by banks.

Gallemore et al; 2014; CAR

Q: Does tax sheltering affect corporate reputation? Do firms and their top executives bear reputational costs from engaging in aggressive tax avoidance activities? M: Recent studies had shown that firms do engage in tax avoidance. However other firms do not avoid taxes to the full extent possible. This paper provides an answer to this puzzle ("the under-sheltering puzzle"). Also other papers (Hanlon and Heitzman) call for research about the following questions: (1) Why do some corporations avoid more tax than others? (2) How do investors, creditors, and consumers perceive corporate tax avoidance? RD: Combine several past researchers databases of public cases of tax sheltering for the largest (but only 245) sample of shelters. They look at the turnover and other responses (CARs) around revelation of these. R: There does not seem to any connection to between CEO/CFO turnover, sales and ad expense. And weak reaction in CARs. BT: The absence of ex post reputational costs and the insignificance of reputation as a determinant of tax-shelter use suggest that reputational costs are not likely to be responsible for the significant variation in tax sheltering. Thus, it appears that under-sheltering is more of a puzzle than ever.

Chen et al; 2018; RAST

Q: Does tax-motivated income shifting affect a firm's information environment? M: Identifying where earnings were earned is important for investors. Due to income shifting, there exists significant information gathering costs. Research as yet to examine the relation between tax-related income shifting and information asymmetry. Main hypothesis--Tax-motivated income shifting is positively associated with information asymmetry. R: Tax motivated income shifting is associted with higher levels of information asymetry. BT: When U.S. MNCs engage in income shifting, investors benefit from an increase in after-tax cash flows. However, tax-motivated income shifting increases the complexity of the firms' operations and decreases the transparency of accounting information, resulting in a reduction in information quality.

Dyreng et al; 2017; JFE

Q: How have effective tax rates evolved over time? M: Huge disparity between U.S. statutory tax rate and low effective rates. Prior studies have examined cross-sectional determinants of tax avoidance. But, less understanding on how ETRs have changed over time. Hypotheses-- (1) The effective tax rates of US corporations have decreased over time. (2) The effective tax rates of multinational firms are declining more (because they have more opportunities) over time than those of purely domestic firms. (3) For multinationals the effective tax rate on foreign income declines more over time than does the effective tax rate on domestic income. R: Both cash ETR of multinational and domestic firms decreased over time. For multinationals, both foreign ETR and domestic ETR declined, but steeper decline in foreign ETR. Decline in ETR can be partially explained by decline in foreign statutory tax rate and changes in firm characteristics, but they do not fully explain the decline in cash ETR.

Gaertner; 2014; CAR

Q: What effect do after tax compensation incentives have on corporate tax avoidance? M: There seems to be a disparity in the literature. Some papers have found no relation between after tax compensation incentives have on corporate tax avoidance, others have found some evidence of a relation (Rego and Wilson 2013). He also extends the literature by extending Phillips 2003. Moreover, economic theory predicts that management incentives should drive corporate outcomes. Hypotheses--(1) The use of after-tax performance measures in CEO compensation is negatively associated with firms' ETRs. (2) The use of after-tax performance measures in CEO compensation is positively associated with the level of CEO cash compensation. R: CEO After Tax compensation is negatively associated with ETR and possitivley associated with cash compensation.

Gaertner et al; 2019; WP

Q: What effects did the TCJA have on foreign firms? (or rather, in the foreign market as a whole?) M: It is a recent tax-change, no one has look at the foreign effects, has relevance given the uncertainty of taxes given the political environment. Hypotheses--Not really any. This is more of a descriptive exploration. RD: Identification of dates using google trends data on "tax reform." They use these to to do an event study. R: Negative returns in some contries (china, etc.), lower returns from some industries (especially those in chine), also negative returns for high US exports, or are in distress, positive returns for those with lower in-industry returns and for firms whose ETR decreased. BT: In sum, thier results suggest that U.S. tax reform changed the global competitive landscape in systematic, but non-uniform ways.

Hanlon et al; 2019; WP

Q: Which firms have announced TCJA-inspired decisions? What are the extent and nature of these TCJA-inspired decisions? M: The new tax law... The issuance of many statements by firms that certain actions they had taken were in response to/inspired by the new tax law. A connection made by the media that these statements are motivated politically. A desire to understand this phenomenon. F: $72 Billion Tax savings, $441,458,000 increase in worker bonuses. Some evidence that more politically movitated firms are more likely to make an TCJA-related annountment. However, there are also economic reasons firms may want to make the same annountment. BT: Concluded that firms' political motivations may have played a role in these announcements, but that the firms with the most to gain from tax reform were also the most likely to announce actions in response to the TCJA.

Hanlon; 2014; JATA

Q:To what extent does tax enforcement by the tax authority affects the quality of financial reporting? M: The government is the largest stakeholder common for all companies because of tax claim. Due to this interest, the government (via tax authority) is monitoring firms whether managers are using earnings for private benefits (wealth diversion). Mechanism--When managers engage in tax avoidance, they must conceal such actions from tax authority. Therefore, tax enforcement -> reduction in obfuscation -> increase financial reporting quality. Financial reporting quality--the precision or accuracy financial statements capture firm performance. H1--Tax authority enforcement is positively associated with financial reporting quality. H2--The positive association between tax authority enforcement and financial reporting quality is higher when other external monitoring mechanism are weaker. RD: Tax authority enforcement: ex post likelihood of an IRS audit using TRAC data. Financial reporting quality. The extent to which accrual fit into past, current, and future cash flows (Dechow and Dichev 2002) Absolute value of discretionary accruals (Jones 1991; Dechow, Sloan, Sweeny 1995). BT: Tax enforcement works as monitoring mechanism, mitigating agency problems. This increases financial reporting quality.

Implicit taxes

The extent to which tax-favored assets bear lower pretax returns than do tax-disfavored assets. Example: Two types of investors: investor with tp = 35%, investor with tp = 15%. Two differently taxed assets: municipal bonds (tax-favored), corporate bond (tax-disfavored). Corporate bond: Rb = 12.5% rb = 12.5(1-.28)= 9%. Municipal bond: Rm = 9% rm = 9% If tp = 35%, invest to muni bonds because rb = 12.5(1-.35)=8.125%, rm = 9%. If tp = 15%, invest to corp bonds rb = 12.5(1-.15)=10.625%, rm = 9%. Implicit tax on muni bond = (𝟎.𝟏𝟐𝟓−𝟎.𝟎𝟗)/(𝟎.𝟏𝟐𝟓) = 28% (In equilibrium, after tax return of tax-favored asset and tax-disfavored asset are same, thus pretax return of tax-favored asset is lower.)

GAAP Effective Tax Rate

The ratio of total tax expense to pretax income. Problems--based on annual data, tax expense is the sum of both current and deferred tax expense (and therefore miss tax avoidence due to deferring tax, which happens a lot). Using current tax expense can also present problems--does not have permanent differences, and there are book accruals within the tax expense such as the valuation allowance and the tax contingency reserve (or tax cushion).

Dividend received deduction

When corporate stockholders receive dividend from another company, they can deduct 70% of dividend income.