Luann J. Lynch

Tax Reporting Aggressiveness and its Relation to Aggressive Financial Reporting

All authors are grateful to Thomson Financial for providing earnings forecast data, available through the Institutional Brokers Estimate System, as part of a broad academic program to encourage earnings expectations research. ABSTRACT: This study examines the relation between financial and tax reporting aggressiveness. Prior research has documented a growing gap between financial and taxable incomes since 1990. Over the same period, financial and tax regulators have documented an increase in tax shelter activity (aggressive tax reporting) and a concurrent increase in corporate accounting scandals (aggressive financial reporting). Consequently, this paper investigates whether the companies that engage in aggressive financial reporting are also the firms that engage in aggressive tax reporting. Our study is the first to predict and find that some firms tend to report aggressively for both book and tax purposes, while other firms tend to report more conservatively for both book and tax purposes. We use a system of equations to model the endogenous relation between financial and tax reporting decisions. The analysis controls for earnings management and tax planning incentives, and for rule differences between GAAP and tax law. Our bivariate and multivariate results both indicate firms that engage in aggressive financial reporting also engage in aggressive tax reporting. These results are important to both financial and tax regulators, and other stakeholders, who have a vested interest in understanding the interaction of financial and tax reporting decisions. Data Availability: The data used in this study are publicly available from the sources indicated.

The Consequences of the FASB's 1998 Proposal on Accounting for Stock Option Repricing

We examine repricing activity surrounding the FASBs 1998 announcement regarding accounting for repriced options. We find that repricing increases during, and decreases after, the 12-day window between the announcement and proposed effective dates, consistent with firms timing repricings to avoid recording an expense. We find that firms experiencing increasing earnings patterns, firms with earnings around zero, and growth firms are more likely to reprice in the window, but having repriced recently decreases the likelihood of doing so. The evidence suggests that firms trade off financial reporting benefits against reputation costs in decisions to time repricings to get favorable accounting treatment.

Executive Compensation Restrictions: Do They Restrict Firms’ Willingness to Participate in TARP?: EXECUTIVE COMPENSATION RESTRICTIONS AND TARP

We examine the implications of regulatory intervention in pay�?setting, by studying whether executive compensation restrictions associated with the Troubled Asset Relief Program (TARP) influence banks’ participation in the program. We find that banks more likely to be impacted by the restrictions are less likely to participate in TARP. Among banks accepting funds, we find that the likelihood of repaying before the end of 2009 is positively related to CEO incentive compensation. We find greater subsequent executive turnover and lower pay increases in banks accepting funds, consistent with concerns about talent drain. We also find that proxies for self�?serving behavior are related to declining funds, suggesting pay preservation as a potential motive. Despite the motives behind declining funding, we find no evidence that the restrictions limited the objectives of TARP based on banks’ financial health or lending and may have allowed the government to allocate funds more effectively.

The effect of Medicare capital prospective payment regulation: additional evidence from hospital financing decisions

Abstract This study investigates the impact of the 1992 Medicare capital prospective payment regulation on hospital financing decisions, using a sample of California hospitals. The regulation, which changed reimbursement for hospital inpatient capital costs from a cost-based to a fixed fee per patient system, eliminated previous regulatory incentives to use debt and eliminated implicit guarantees of hospital debt service. Overall, I find that hospitals decrease the use of long-term debt after implementation of the regulation and that Medicare share of business and the decrease in capital expenditures are significant in explaining this decrease. In addition, I find that the decline is substantially greater for high-cost than low-cost hospitals. Multivariate analyses suggest that some low-cost (high-cost) hospitals increase (decrease) debt, after controlling for other factors. For low-cost hospitals, the relation between Medicare share of business and debt becomes more negative after the regulatory change, suggesting that low-cost hospitals with greater dependence on Medicare business are more likely to decrease debt. For high-cost hospitals, the relation between capital expenditures and debt becomes less positive after the regulatory change, suggesting that a decrease in capital expenditures affects the need for debt financing. Combined with results from prior research that suggest that low-cost (high-cost) hospitals increase (decrease) capital expenditures following the regulation, results are consistent with changes in capital expenditures leading to differential needs for financing and with hospitals adjusting financing practices in response to the expected increase (decrease) in capital cost reimbursement.

Executive Compensation Do Economic Profits Matter

Economic profit (EP) is often portrayed as a gauge of company and executive performance that can align the interests of shareholders and corporate executives. We report the results of an investigation into the relationship between EP and compensation paid to “named executive officers” (NEOs) for an extensive sample of companies, over several years. Although the original objective was to establish the share of EP that is typically paid as compensation to NEOs, the empirical relationship between the two variables is negligible to nonexistent. Instead, most firm-level NEO compensation is explained by a company size measure, in particular, total assets, with some additional explanatory power added by operating income and industry type.

Voluntary Disclosure of the Components of Revenue Growth

In this study we examine the valuation implications for different sources of growth. Specifically, we investigate whether supplemental information provided by firms to assist financial statement users in understanding the sources of growth is reflected in a premium to those firms. We examine a unique sample of firms that voluntarily choose to provide detail about their levels of organic revenue growth. Results indicate that firms that are larger, with lower research and development expenditures, and with higher intangible assets are those more likely to provide detailed disclosures about revenue growth components, all characteristics consistent with incentives to provide additional transparency regarding revenue growth. In regressions of returns on earnings disaggregated into revenue growth and costs, we find evidence that there is indeed a valuation premium to organic growth relative to non-organic growth. These findings are consistent with investors viewing the organic growth component of revenues as more persistent than the non-organic component of growth. Consistent with this interpretation, we document significant persistence of organic revenue across periods and a notable lack of such persistence for non-organic revenue growth.