Jennifer L. Blouin

Capital Gains Taxes and Equity Trading: Empirical Evidence

Individual investors have an incentive to defer selling appreciated stock until it qualifies for tax-favored, long-term capital gains treatment. Shackelford and Verrecchia [2002] show that these incentives can affect equity trading around public disclosures. This article provides some empirical support for their theory with evidence of price increases and equity constrictions around announcements of quarterly earnings and additions to the S&P 500 index. We find share returns rise and trading volume falls with the incremental taxes saved by deferring the sale of appreciated property. The price increases, however, are temporary, reversing in subsequent trading days. The results are consistent with buyers believing the compensation to sell before long-term qualification (through higher prices) is less costly than holding an inappropriately weighted portfolio. This finding-that personal capital gains taxes affect equity trading-adds to a growing literature that challenges longstanding assumptions that firm value is independent of shareholders and their taxes. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2003.

Is U.S. Multinational Dividend Repatriation Policy Influenced byReporting Incentives

This study finds evidence that public-company reporting by U.S. multinational corporations (MNCs) creates disincentives to repatriate foreign earnings to the U.S. and contributes to the accumulation of cash abroad. MNCs operate under U.S. international tax laws and financial reporting rules and face two potential consequences when they repatriate foreign earnings: a cash payment for repatriation taxes and a reduction in reported accounting earnings. Using a confidential dataset of financial and operating characteristics of foreign affiliates of MNCs combined with public-company data, we examine how repatriation amounts vary across firms that face relatively strong reporting incentives to defer an accounting expense. Our results suggest that reporting incentives reduce repatriations by about 17 to 21 percent annually.

The Initial Impact of the 2003 Reduction in the Dividend Tax Rate

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces the maximum statutory personal tax rate on dividends from 38.1 percent to 15 percent. This study analyzes dividend declarations in the quarters surrounding passage. We find dramatic increases in regular dividends and special dividends after enactment and a decline in share repurchases. We find some evidence that the firms changing their distribution patterns are owned disproportionately by insiders. This finding is consistent with manager-owners modifying the firms dividend policy to reflect the new tax-advantaged status of dividend income for individual investors.

Does Tax Aggressiveness Reduce Corporate Transparency

This paper investigates whether aggressive tax planning firms have less transparent information environments. Although tax planning provides expected tax savings, it can simultaneously increase the financial complexity of the organization. And, to the extent that this greater financial complexity cannot be adequately communicated to outside parties, such as investors and analysts, transparency problems can arise. Our investigation of the association between a newly developed measure of tax aggressiveness and information asymmetry, analyst forecast errors, and earnings quality suggests that aggressive tax planning decreases corporate transparency. We also find evidence, however, that managers at tax aggressive firms attempt to mitigate these transparency problems by increasing the volume of tax-related disclosure. Overall, our results suggest that firms face a trade-off between financial transparency and aggressive tax planning thereby potentially explaining why some firms appear to engage in more conservative tax planning than would otherwise be optimal.

The Location, Composition, and Investment Implications of Permanently Reinvested Earnings

This study uses permanently reinvested earnings (PRE) reported in U.S. multinational corporations (MNCs) financial statements, combined with detailed information on foreign affiliate assets to estimate the location and composition of PRE. We use these estimates to gain an understanding of the motivations for PRE designations, and thus implications of reported PRE for firms’ growth and liquidity, as well as the potential effects of U.S. tax reform. Our analysis suggests that PRE designations are driven by earnings incentives and growth – 94 percent of PRE is located in affiliates that would require recognition of an expected repatriation tax expense, and 60 percent of PRE is in high growth affiliates. While our estimates suggest that most PRE are associated with unrecognized repatriation tax obligations, the existence of some PRE in high tax jurisdictions reduces the potential tax revenue associated with PRE. We also find that, for firms in overall non-binding foreign tax credit positions, a significantly greater proportion of PRE in low-tax jurisdictions is held in cash, relative to high-tax jurisdictions, suggesting liquidity implications arising from the current tax system.

Does Acquistion by Non-U.S. Shareholders Cause U.S. Firms to Pay Less Tax?

A battery includes a battery case, an electrode assembly, positive and negative electrode collectors, a sealing body, an external terminal, a conducting member, a deforming plate, and a first insulating member. The positive or negative electrode collector has a base portion facing the first insulating member, and a lead portion connected to the electrode assembly. A fixing portion fixing the base portion and the first insulating member to each other is provided in the first insulating member. The fixing portion is located nearer to the connection portion between the deforming plate and the positive or negative electrode collector than the sealing body side support position of the first insulating member. The outer peripheral edge of the electrode assembly side surface of the first insulating member is provided with a rib protruding to the electrode assembly side and extending along the outer peripheral edge of the base portion.

Capital Gains Holding Periods and Equity Trading: Evidence from the 1998 Tax Act

This paper exploits an unusually powerful setting to explore a choice many individual investors face regularly the decision to sell today or postpone selling until lower rates are available in the future. We examine trading volume and stock returns around the 1998 reduction in the holding period required for individual investors to receive the most favorable long-term capital gains tax rate. For firms whose initial public shareholders were affected by the legislation, we find trading volume increasing and share returns decreasing in past price performance on the day the legislation was publicly disclosed. The results are consistent with capital gains holding periods distorting markets sufficiently that if investors are permitted to liquidate appreciated positions at favorable rates, enough will sell immediately to move prices. To our knowledge, this is the first study linking trading volume and security prices to a change in capital gains holding periods.

Conflicting Transfer Pricing Incentives and the Role of Coordination

Our study evaluates the role of coordination, at both the government- and the firm-level, on the transfer prices set by U.S. multinational corporations (MNCs) when income taxes and duties cannot be jointly minimized with a single transfer price. We find that either the presence of a coordinated income tax and customs enforcement regime or coordination between the income tax and customs functions alters transfer prices for these firms. Our analyses have implications for both firms and taxing authorities. Specifically, our findings suggest that MNCs might decrease their aggregate tax burdens by increasing coordination within the firm, or that governments might increase their aggregate revenues by improving coordinating enforcement across taxing authorities. Our study is novel in that we document, in a specific setting, how coordination influences MNCs’ tax reporting behavior.