Steven Utke

The Financial Reporting Effects of Tax-Deductible Goodwill Impairments

We investigate whether special tax deductions for goodwill impairments influence financial reporting decisions. Unlike most countries, Luxembourg allows tax deductions for goodwill impairments without the need to dispose of any assets. We predict and find that multinational firms with subsidiaries in Luxembourg are more likely to write-down goodwill, and write down larger amounts of goodwill on average, than multinational firms without subsidiaries in Luxembourg. However, we find that conditional on recording a goodwill impairment, the amount of each goodwill write-down does not differ between multinational firms with and without Luxembourg subsidiaries. This is consistent with tax deductibility of goodwill impairments inducing more timely, rather than larger, impairments. We contribute to the literature on the interaction between book and tax reporting, the determinants of goodwill impairments, and the effects of book-tax conformity. This is one of the few studies that looks at the mechanisms through which firms avoid tax, in particular, examining a previously unexplored aspect of tax haven usage.We investigate whether special tax deductions for goodwill impairments influence financial reporting decisions. Unlike most countries, Luxembourg allows tax deductions for goodwill impairments without the need to dispose of any assets. We predict and find that multinational firms with subsidiaries in Luxembourg are more likely to write-down goodwill, and write down larger amounts of goodwill on average, than multinational firms without subsidiaries in Luxembourg. However, we find that conditional on recording a goodwill impairment, the amount of each goodwill write-down does not differ between multinational firms with and without Luxembourg subsidiaries. This is consistent with tax deductibility of goodwill impairments inducing more timely, rather than larger, impairments. We contribute to the literature on the interaction between book and tax reporting, the determinants of goodwill impairments, and the effects of book-tax conformity. This is one of the few studies that looks at the mechanisms through which firms avoid tax, in particular, examining a previously unexplored aspect of tax haven usage.

Structural Equation Modeling in Archival Capital Markets Research: An Empirical Application to Disclosure and Cost of Capital

Structural equation modeling (SEM), a methodology currently underutilized by archival accounting researchers, enables examination of paths linking constructs in complex models. In this paper, we first discuss SEM, including basics, underlying assumptions, advantages and disadvantages, properties of the estimates, and best practices. We then apply SEM to an accounting topic by using common factor analysis to create latent variables (constructs or factors) for earnings quality, voluntary disclosure, information asymmetry, and cost of equity capital and then examining the paths among those constructs. We find that higher earnings and voluntary disclosure quality are negatively associated with cost of capital both directly and indirectly through information asymmetry. Further, the paths from voluntary disclosure quality to cost of capital are significant even after controlling for the paths from earnings quality to cost of capital. SEM allows us to perform our analysis, which would not be possible with other techniques, and potentially offers fruitful avenues for future research in accounting.

Structural Equation Modeling in Archival Capital Markets Research: An Application to Disclosure and Cost of Capital

Structural equation modeling (SEM), a methodology currently underutilized by archival accounting researchers, enables examination of paths linking constructs in complex models. In this paper, we first discuss SEM, including basics, underlying assumptions, advantages and disadvantages, properties of the estimates, and best practices. We then apply SEM to an accounting topic by using common factor analysis to create latent variables (constructs or factors) for earnings quality, voluntary disclosure, information asymmetry, and cost of equity capital and then examining the paths among those constructs. We find that higher earnings and voluntary disclosure quality are negatively associated with cost of capital both directly and indirectly through information asymmetry. Further, the paths from voluntary disclosure quality to cost of capital are significant even after controlling for the paths from earnings quality to cost of capital. SEM allows us to perform our analysis, which would not be possible with other techniques, and potentially offers fruitful avenues for future research in accounting.

Financial Reporting Choices of Large Private Firms

We perform the first study of the fundamental financial reporting choices – audit, auditor, accounting standard, internal controls audit – of private funds (e.g., private equity, hedge funds, etc.), which represent an increasingly important component of the economy. We find that nearly 80% of private funds that are not subject to mandatory audit requirements obtain audits voluntarily. Larger, older funds with more owners and a higher level of sophisticated ownership are more likely to obtain audits, while funds with a higher level of inside ownership are less likely to obtain audits. Many of these characteristics are also associated with the likelihood of funds engaging a Big 4 auditor, obtaining an internal controls audit, and preparing GAAP financial statements. The growth and creation (termination) of private funds is positively (negatively) associated with funds’ preparation of GAAP financial statements or engagement of Big 4 auditors, providing new evidence on the value of financial reporting in the capital formation process. Overall, our evidence suggests that high-quality financial reporting aids private funds’ capital formation and that funds’ agency costs and the information needs of their equity investors influence funds’ financial reporting choices.

Structural Equation Modeling in Archival Capital Markets Research

Structural equation modeling (SEM), a methodology currently underutilized by archival accounting researchers, enables examination of paths linking constructs in complex models. In this paper, we first discuss SEM, including basics, underlying assumptions, advantages and disadvantages, properties of the estimates, and best practices. We then apply SEM to an accounting topic by using common factor analysis to create latent variables (constructs or factors) for earnings quality, voluntary disclosure, information asymmetry, and cost of equity capital and then examining the paths among those constructs. We find that higher earnings and voluntary disclosure quality are negatively associated with cost of capital both directly and indirectly through information asymmetry. Further, the paths from voluntary disclosure quality to cost of capital are significant even after controlling for the paths from earnings quality to cost of capital. SEM allows us to perform our analysis, which would not be possible with other techniques, and potentially offers fruitful avenues for future research in accounting.

Structural Equation Modeling in Archival Accounting Research: An Application to Disclosure and Cost of Capital

Structural equation modeling (SEM), a methodology currently underutilized by archival accounting researchers, enables examination of paths linking constructs in complex models. In this paper, we first discuss SEM, including basics, underlying assumptions, advantages and disadvantages, properties of the estimates, and best practices. We then apply SEM to an accounting topic by using common factor analysis to create latent variables (constructs or factors) for earnings quality, voluntary disclosure, information asymmetry, and cost of equity capital and then examining the paths among those constructs. We find that higher earnings and voluntary disclosure quality are negatively associated with cost of capital both directly and indirectly through information asymmetry. Further, the paths from voluntary disclosure quality to cost of capital are significant even after controlling for the paths from earnings quality to cost of capital. SEM allows us to perform our analysis, which would not be possible with other techniques, and potentially offers fruitful avenues for future research in accounting.