Scott B. Jackson

Do initial public offering firms understate the allowance for bad debts

Abstract In this study, we investigate whether initial public offering (IPO) firms understate the allowance for bad debts in the two annual periods adjacent to their IPOs. The evidence suggests that IPO firms understate the allowance for bad debts in both periods, and that high quality auditors have little effect on the extent to which the allowance for bad debts is understated. The evidence also indicates that the magnitude of the understatement is economically significant in relation to the recorded balance in the allowance account. It is estimated that the mean (median) understatement of the allowance for bad debts by IPO firms is approximately 40% (75%) and 35% (60%) of its recorded balance in the year before and year after IPO, respectively.

The effect of tax refunds on taxpayers’ willingness to pay higher tax return preparation fees*

ABSTRACT This study examines the historical profile of tax refunds and reports the results of an experiment which helps to explain an economic consequence that tax refunds may engender. Analysis of historical tax refund data reveals that the incidence and magnitude of tax refunds have increased significantly over the past half-century, which suggests that legislative efforts aimed at reducing tax refunds have been largely ineffective. The results of the experiment reveal that taxpayers who receive tax refunds from the IRS tend to frame tax return preparation fees as a cost, while taxpayers who owe the IRS additional taxes tend to frame tax return preparation fees as a loss. In turn, the manner in which taxpayers frame tax return preparation fees influences the perceived benefits that taxpayers ascribe to the tax return preparation service, which, in turn, influences taxpayers’ willingness to pay higher tax return preparation fees. Importantly, when the results of this study are considered in conjunction with the results of extant research, which reveals that tax professionals bill taxpayers for larger fractions of billable fees when taxpayers receive tax refunds than when taxpayers owe additional taxes (Hatfield et al., 2007), it seems reasonable to conclude that higher equilibrium tax return preparation fees are likely to evolve when taxpayers receive tax refunds than when they owe additional taxes.