Daniela Lorenz

Investment Valuation with Tax-optimized Financing Decisions and a Tax-optimized Default Alternative

In this paper we evaluate an indivisible investment project that is carried out in a corporation under very simple premises. In particular, we discuss a one-period model with certainty, the pure domestic case and proportional tax rates. Surprisingly, the decision problem turns out to be rather complex if one has to make allowance for different taxation of the corporation and its owner. Altogether there are more than 10 cases that have to be distinguished if the firm’s managers want to make a correct decision, depending on the relation of personal and corporate tax rates.

How Will the Court Decide? – Tax Experts’ versus Laymen's Predictions

Abstract We conduct a survey of German tax professionals (tax advisors and revenue agents) and laymen to examine whether tax experts more accurately forecast the outcomes of five real cases from the German Federal Fiscal Court. With an average of 2.39 correct predictions among experts and an average of 2.49 correct predictions among laymen, our results reveal no significant difference in forecasting accuracy between the two groups. Additionally, neither general nor task-specific tax expertise increases the experts’ forecasting accuracy. This unpredictability of tax court decisions indicates that accounting rules and taxpayer penalties that rely on accurate predictions of tax court decisions may need to be re-evaluated. Moreover, our results indicate the existence of two types of ‘advisor bias’. First, tax advisors exhibit a significantly higher level of overconfidence in comparison to other experts (i.e. revenue agents) and laymen. In particular, they believe that they correctly predict, on average, 1.52 more cases than they actually do. Second, we find some evidence indicating that tax advisors acting as client advocates form stronger appeal recommendations than revenue agents.

DEFAULT TRIGGERS: DOES A LIQUIDITYBASED DEFAULT IMPLY OVER-INDEBTEDNESS AND VICE VERSA?

Illiquidity and over-indebtedness are common triggers of insolvency. In a discounted cash flow (DCF) framework we examine the relationship between these two triggers to verify whether these triggers are likely to coincide or whether one drives the other. We show in our analytical investigation that over-indebtedness necessarily implies danger of illiquidity at some future date. For three specific financing policies we provide sufficient and where possible, necessary conditions for the occurrence of both triggers.