George A. Plesko

EARNINGS MANAGEMENT AND THE CORPORATE ALTERNATIVE MINIMUM TAX

This study tests whether firms affected by the U.S. corporate alternative minimum tax (AMT) enacted as part of the Tax Reform Act of 1986 (TRA 86) managed their 1986 and 1987 earnings to reduce their tax liabilities. One provision of TRA 86 required the inclusion of a variant of financial accounting income (AMT book) in the AMT income tax base for 1987 through 1989. The AMT created an incentive to shift income to 1986 from 1987 to avoid the 20% tax rate on alternative minimum taxable income (AMTI) and an effective marginal rate of 10% on AMT book exposure. On the

Estimates of the Magnitude of Financial and Tax Reporting Conflicts

This study examines the tax reporting consequences of financial reporting discretion. Using a matched sample of financial statements with tax returns, I provide estimates of the accuracy of tax return information inferred from financial statements. To examine the tradeoffs between financial and tax reporting, I model the relation discretionary financial accounting accruals have to discretionary federal tax accruals. The methodology takes advantage of the contemporaneous nature of reporting to mitigate econometric problems identified in previous research. I find the extent tax reporting reflects discretionary financial reporting varies dramatically by industry, profitability, and the sign of discretionary accruals. I also find managers are able to undertake tax reducing activities with less of an effect on financial reporting than tax increasing accruals, consistent with recent evidence on the differential growth of book and tax income, and with tax avoidance activities.

Corporate Taxation and the Financial Characteristics of Firms

This article provides estimates of the effects of corporate taxation on the financial characteristics of firms. For a large number of corporations the corporate tax is voluntary, as they have the choice of operating as an S corporation—a pass-through entity similar to a partnership. Given that firms appear to volunteer to pay an additional tax, this article examines the behavior of firms to identify the relationship between their choice to be subject to the corporate tax and tax minimizing strategies. Analyzing firms with positive and negative income separately, the results suggest that the probability a firm has chosen to be taxable increases with firm size and with activity consistent with mitigating both the corporate and individual tax on corpo rate income. In addition, there is strong evidence that the additional administrative burden caused by a lack of conformity between state and federal tax treatment of S corporations provides a significant disincentive to the use of pass-through corporations.

Costly Dividend Signaling: The Case of Loss Firms with Negative Cash Flows

We examine the dividend-signaling hypothesis in a sample of firms for which dividend increases are particularly costly, namely loss firms with negative cash flows. When compared to loss firms with positive cash flows, we find the predictive power of dividend increases for future return on assets to be greater for loss firms with negative cash flows, consistent with the predictive power of the dividend signal being stronger when its cost is higher. Our results provide support for the dividend-signaling hypothesis and have broader implications since loss firms comprise a large and increasing share of publicly-traded firms.

Omitted Variable Bias in Time Series Estimates of Capital Gains Realizations

This paper addresses the omitted variable problem in time series studies of individual capital gains realizations. While not directly identifying the omitted variables, I use the realizations of corporate capital gains to test for common omitted variables. Jointly estimating individual and corporate realizations provides more efficient estimates than traditional single-equation models. The results provide empirical support for omitted variables being important in time series models. In both single-equation or multi-equation models controlling for omitted variables greatly reduces the estimated elasticities of individual and corporate capital gains.