David A. Guenther

The association between financial accounting measures and real economic activity: a multinational study

Abstract We investigate how cross-country differences in financial accounting standards affect the relation between financial accounting earnings and real economic value-relevant events that underlie those earnings. Based on previous research and economic theory we hypothesize that, because of differences in legal systems and the demand for accounting information, differences in legal protection for external shareholders, and differences in the degree of tax conformity in our sample countries, accounting earnings in the UK and the US will be more closely related to underlying economic activity than will accounting earnings in France and Germany. Empirical results are generally consistent with our hypothesis.

Financial Reporting Environments and International Capital Mobility

We examine whether differences in international capital mobility across countries are related to country-specific differences in financial reporting environments. We hypothesize that countries where financial accounting environments lead to greater disclosure of value-relevant accounting information are more likely to have higher international capital mobility. The results of empirical tests are consistent with our hypothesis. Copyright 2003 The Institute of Professional Accounting, University of Chicago..

Differences between COMPUSTAT and CRSP SIC codes and related effects on research

Abstract Differences between SIC codes assigned to companies by COMPUSTAT and CRSP are examined. Large differences are observed at two-, three-, and four-digit levels. Correlations of intra-industry monthly stock returns are larger, and variances of intra-industry financial ratios are smaller for industries based on COMPUSTAT codes. Replication of a portion of Freeman and Tse (1992) produces significant results using COMPUSTAT codes, consistent with the original research, but insignificant results for CRSP codes.

Capital gains tax rates and the cost of capital for small business: evidence from the IPO market

Abstract We examine the issue prices of small initial public offerings around the 1993 tax law change that reduced the capital gains tax on qualified small business stock. We compare the actual issue price of new stock with a benchmark price that is not affected by the change in capital gains tax. We find that, after controlling for IPO underpricing, the issue prices of qualifying small business stock after the tax rate change are significantly higher than the issue prices before the change. A control sample of nonqualifying firms shows no significant difference in issue prices.

The relation between tax rates and pre-tax returns direct evidence from the 1981 and 1986 tax rate reductions☆

Abstract This study documents one effect of the theory of implicit taxes, providing evidence that a change in the tax rate results in a change in pre-tax returns. Yield spreads of pairs of Treasury bills maturing in the last week of December and the first week of January are examined. Year-ends not affected by rate changes show a significant positive yield spread between these pairs of bills, reflecting an upward-sloping yield curve. However, for year-ends coinciding with the tax rate reductions of 1981 and 1986 there is a significant negative yield spread between these pairs of bills.

Accounting standards and national tax laws: The IASC and the ban on LIFO

Abstract We investigated the link between tax laws and financial accounting standards by considering the attempt by the International Accounting Standards Committee (IASC) to ban the use of the LIFO inventory method. Our goal was to identify evidence of non-tax-motivated use of or preference for LIFO primarily through an examination of publicly available responses to the IASC exposure drafts. We found that the only support for LIFO as a preferred inventory accounting method came from those countries in which the method is allowed for tax purposes. In supplementary analysis of the use of LIFO in Canada and South Africa—where the method is allowed for financial reporting purposes but not for tax purposes—those few Canadian firms which chose LIFO appeared to do so because of U.S. tax laws, and when LIFO was disallowed for tax purposes in South Africa, those firms previously using LIFO for financial reporting purposes then changed to FIFO or average cost. The r results suggest that the theoretical support for the LIFO inventory method, as well as its use, are confined to those countries in which LIFO provides a tax advantage.

Are 'Tax Aggressive' Firms Just Inflating Earnings?

We investigate whether low Cash ETRs are associated with two distinct effects — tax avoidance and low earnings quality — and if so, whether the two effects can be separated. Separating these effects is important: if upward earnings management is driving low Cash ETRs, inferences based on tax avoidance may not be valid. Our results demonstrate Cash ETRs are associated with both earnings quality and tax avoidance. We test an alternative measure, the ratio of cash taxes paid to pretax operating cash flows, and provide evidence that this measure mitigates the association with earnings quality while retaining the association with tax avoidance.

Capital Gains Taxes and Risk with a Fixed Supply of Risky Assets

Economic theory has long argued that when risk-averse investors are price-takers, a tax on risky returns (with full tax benefit for losses) will cause investments in risky assets to increase because the tax reduces after-tax risk. We extend this result to a setting with a fixed supply of risky assets, so that the increased demand due to lower after-tax risk leads to an increase in price and a decrease in pre-tax returns. In this setting the tax-induced increase in demand for risky assets is mitigated by the lower pre-tax returns, and the increase is much smaller than predicted by previous models. Our results have important implications for understanding how taxes affect investor behavior and for studies in accounting that examine the effect of taxes on investments in risky assets.