Raquel Meyer Alexander

Does College Savings Plan Performance Matter

Abstract Section 529 college savings plans are tax-favored investment vehicles, which saw tremendous growth after the Economic Growth and Tax Relief Reconciliation Act of 2001 expanded 529 plan benefits to include tax-free distributions for qualified higher education expenses. However, regulators, the press, and fund advisors criticized the Section 529 college savings plan industry for inadequate and nonuniform disclosures of investor information, such as historical returns, fees, taxes, and underlying investments. We investigate consumers’ investment choices after a disclosure regime change in 2003 and find that after enhanced disclosures became widely available, investors selected fewer plans offered exclusively through brokers, increasingly chose portfolios based on past investment performance, but remained unresponsive to state tax benefit disclosures. We also analyze the plans’ performance and find evidence that 529 investors are constrained to invest in portfolios with high, return-eroding fees. Nearly 20 percent of the portfolios have a statistically significant negative alpha, the measure of risk-adjusted excess return, while less than 1 percent have a statistically significant positive alpha.

Tax Shelters, Tax Havens and Permanently Reinvested Earnings

We examine the relationship between corporate subsidiaries located in tax haven countries, the parent firms’ tax sheltering activity, and permanently reinvested earnings. We measure tax shelter intensity with tax reserves established under ACS 740-10 for uncertain tax positions that are unlikely to be upheld upon audit. In the sample of 768 Fortune 1000 firms, each firm has, on average, 84 subsidiaries in 19 locations, with 8 subsidiaries in tax haven countries. Firms with larger amounts of permanently reinvested earnings show greater tax shelter intensity; for every

Market Response to FIN 48 Adoption: A Debt Covenant Theory

1 billion in permanently reinvested earnings, firms increase tax reserves for uncertain positions by

How Investors Respond to Disclosures: The Case of 529 College Savings Plans

20.6 million. After controlling for the level of permanently reinvested earnings, we find that firms’ tax shelter intensity increases with the number of tax haven jurisdictions in which they establish subsidiaries. In additional analysis controlling for industry, foreign operations and tax burden, we find tax shelter intensity increases for firms having subsidiaries located in four tax havens: British Virgin Islands, Hong Kong, Malta and Singapore.

Using social media to report financial results

Abstract We investigate the interaction of debt covenants and tax accounting on the adoption of Financial Interpretation No. 48 (FIN 48). We examine how firms respond to the potential tightening of covenant slack upon FIN 48 adoption and whether these actions are penalized by creditors and anticipated by equity markets. We find that upon FIN 48 adoption, the majority of sample corporate borrowers increase their tax reserves and reduce equity. Firms close to debt covenant violation were even more likely to increase tax reserves upon FIN 48 adoption; however, the size of the adjustment was relatively smaller, suggesting that the FIN 48 standards limited, but did not eliminate, firms use of discretion in reporting uncertain tax positions to avoid costly covenant violations. For firms near net worth debt covenant violation, the act of decreasing equity upon FIN 48 adoption imposes real economic costs, as the average cost of debt increased by 43 basis points. Finally, we extend prior research on the market response to FIN 48 by showing how the market response to FIN 48 adoption is a function of debt covenant slack and tax aggressiveness. Specifically, the cumulative abnormal return at the FIN 48 exposure draft release date is negative only for tax aggressive firms that are close to debt covenant violation.

An Examination of Convergent Validity Between In-Lab and Out-of-Lab Internet-Based Experimental Accounting Research

We examine a new government-sponsored investment vehicle available only to individual investors, 529 college savings plans, to analyze consumers’ investment behavior after a significant change in disclosures of historical investment returns and tax benefits. We find evidence that disclosures affect investment decisions. After 529 plans voluntarily adopted more informative disclosures, 529 plan investors selected fewer plans offered only through broker-sold channels and increasingly chose plans based on past investment performance. We enhance the Fama-French model to perform a descriptive financial analysis of 529 plan offerings and find compelling evidence that 529 investors are constrained to invest in funds with return-eroding high fees. Nearly 20 percent of the portfolios have a statistically significant negative alpha, the measure of risk-adjusted excess return, while less than 1 percent have a statistically significant positive alpha. We discuss 529 plan oversight and potential implications for self-directed retirement savings and social security privatization.