1,721,020 research outputs found
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The Unintended Consequence of Anti Patent Troll Laws on State Tax Revenues
Full text linkI study whether the adoption of state anti-patent troll laws incentivizes protected firms to be more tax aggressive. Non-practicing entities, or patent trolls, have widely been recognized as a social detriment by regulators, prompting many states in the U.S. to enact legislature designed to counteract patent trolling and spur within-state innovation. While prior studies have shown that anti-troll laws generally associate with ex-post positive outcomes (e.g., increased innovation), I predict and find that the adoption of anti-troll laws gives rise to a loss in state tax revenues by firms exploiting the resulting increase in intellectual property (IP) to shift profits to lower-tax jurisdictions. Specifically, following the passage of anti-troll laws, 1) firms operating in adopting states report lower state effective tax rates and assign significantly more patents to tax havens, and 2) adopting states experience lower corporate income tax revenue growth. Economically, my results suggest that firms operating in anti-troll states lower state tax burdens by 19 percent relative to unprotected firms on average. I also find that U.S. multinationals operating in anti-troll states engage in more tax-motivated outbound income shifting. My study is the first to provide evidence that state legislators’ efforts to protect local firms from patent trolls could have unintended negative state tax revenue consequences
Permanent and temporary tax avoidance as a source of financing: How to succeed where the American Jobs Creation Act of 2004 failed
Full text linkThe repatriation tax holiday enacted by the American Jobs Creation Act of 2004 mandated that the proceeds be used for investment. However, the academic literature has found this mandate to be ineffective (Blouin and Krull, 2009). In this paper, I examine the determinants of using tax savings for investment purposes. Using the cash flow statement identity, I estimate how firms allocate permanent tax savings, temporary tax savings, and their other operating cash flows among the following uses: investment, holding as cash, or reducing debt or equity. I find that temporary tax savings are used for investment to a greater extent than permanent tax savings or cash flow from operations, and that investment levels are partially sticky after temporary savings reverse. I also find that financially constrained firms and domestic firms invest a larger portion of their tax savings than fully invested firms or multinational firms. Finally, I show that tax savings from accelerated tax depreciation are invested at a greater rate than savings from the AJCA repatriation tax holiday. My results suggest that policymakers interested in ensuring tax savings are invested should offer temporary tax savings to domestic, financially constrained firms
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Patent Collateralization and Tax-motivated Outbound Income Shifting
Full text linkI study whether patents pledged as collateral for debt financing constrain US multinationals’ (MNCs) tax-motivated outbound income shifting (TMOIS). US MNCs generally prefer high patent valuations when collateralizing their patents but low patent valuations when using patents for TMOIS. Tax authorities can rely on patent collateral valuations to constrain US MNCs’ ability to artificially depress patent values for TMOIS. Moreover, banks often restrict US MNCs from relocating collateralized patents in lending contracts. Therefore, US MNCs that collateralize patents face increased costs of using those patents to engage in TMOIS. I provide evidence that the number of collateralized patents is negatively associated with US MNCs’ TMOIS. The negative association between patent collateralization and TMOIS is more pronounced for US MNCs with strong debt financing needs and when tax authorities’ resources are constrained. My study sheds light on a source of information that tax authorities can rely on to detect and deter aggressive income shifting strategies
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The Impact of Hedging and Non-Hedging Derivatives on Tax Avoidance
Full text linkThis paper introduces new evidence on the extent to which non-financial firms use financial derivatives to avoid taxes. In particular, I use the fair value of derivatives segregated by hedging and non-hedging designation to identify derivative activities that are used to benignly and/or aggressively avoid taxes. I use new derivative disclosures required by SFAS 161 to collect detailed information about firms’ use of derivatives. I find a negative association between cash effective tax rates and the fair value of hedging derivative assets. This finding implies that firms defer recognition of gains on hedging derivatives to lower cash taxes. Furthermore, I find an association between cash effective tax rates and both non-hedging derivative assets and liabilities. This finding is consistent with firms aggressively avoiding cash taxes using non-hedging derivatives by selectively choosing when to recognize gains and losses. In addition, I find no association between GAAP effective tax rates and derivatives, implying that firms in my sample do not use derivatives to manage earnings through the tax expense
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Business as Usual? GAAP Classification and Acquired Innovation
Full text linkThe definition of a business per U.S. GAAP is a key part of the accounting for acquisitions because it determines a transaction’s classification between a business combination and an asset acquisition. This classification, in turn, determines the accounting treatment for acquired in-process research & development (IPR&D), capitalized in a business combination but immediately expensed in an asset acquisition. In this study, I examine the effect of a change in the definition of a business per Accounting Standards Update (ASU) No. 2017-01 on acquisition activity by firms that rely on acquired IPR&D as a core component of their innovation strategy. Consistent with a narrowed definition of a business increasing the likelihood of asset acquisition classification that lowers reported earnings through immediate expensing of IPR&D, I find these firms reduce their acquisition activity following the adoption of ASU 2017-01. Results of additional analyses suggest potentially economically inefficient implications for these firms’ overall innovation strategy
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When Friends Become Foes: Disclosure Decisions After Failed M&A Deals
Full text linkIn this paper, I examine the effects of failed M&A deals on firms’ disclosure decisions. As a firm’s detailed proprietary information is shared with the counterparty during an M&A deal, the value of the information declines if the deal fails. As a result, it becomes less costly for the firm to disclose the information publicly. Consistent with this reasoning, I find increases in the disclosure of proprietary information in the year after firms experience failed deals. I strengthen my inference through a quasi-natural experiment based on the Federal Trade Commission’s guidance, which constrains the exchange of proprietary information during M&A deals. I also provide evidence that investor demand contributes to this effect. Finally, consistent with the notion that increased disclosure of proprietary information effectively reduces information asymmetry, I find decreases in information asymmetry between firms and their investors after failed deals. Overall, my study sheds light on how failed deals affect the disclosure decisions and information environment of the firms involved
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Mandatory Pay Range Disclosures and Firm Information Environment
No full textThis study leverages the staggered adoption of mandatory pay range disclosure laws as an exogenous shock to proprietary labor cost of information to study the impact of mandatory disclosure on voluntary disclosure. Specifically, I focus on voluntary product-related disclosure and find a significant decrease in product and customer announcements following the implementation of pay range disclosure mandates. This finding is consistent with the notion that firms strategically withhold certain types of proprietary information when compelled to disclose others, aiming to safeguard their overall competitive advantage. The effect is particularly evident in highly competitive environments and firms with intensive research and development activities. Regarding the net effect on the information environment, I find that affected firms experience a lower bid-ask spread, suggesting that the mandatory disclosure of granular pay information more than compensates for the reduction in voluntary information. Overall, this study is among the first to show the relationship between mandatory labor cost information and the voluntary disclosure of product market information
Going Beyond Counting First Authors in Author Co-citation Analysis
Full text linkThe present study examines one of the fundamental aspects of author co-citation analysis (ACA) - the way co-citation
counts are defined. Co-citation counting provides the data on which all subsequent statistical analyses and mappings
are based, and we compare ACA results based on two different types of co-citation counting - the traditional type that
only counts the first one among a cited work's authors on the one hand and a non-traditional type that takes into
account the first 5 authors of a cited work on the other hand. Results indicate that the picture produced through this non-traditional author co-citation counting contains more coherent author groups and is therefore considerably clearer. However, this picture represents fewer specialties in the research field being studied than that produced through the traditional first-author co-citation counting when the same number of top-ranked authors is selected and analyzed. Reasons for these effects are discussed
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Accounting for Leases and Portfolio Decisions of Active Corporate Bond Funds
No full textThis study examines the impact of the new lease standard, ASC 842, on the portfolio decisions of active corporate bond funds. ASC 842 requires firms to recognize operating leases on the balance sheet and disclose additional information to support this recognition. Using monthly portfolio holdings, I find that shortly after its implementation, active corporate bond funds reduce holdings of bonds issued by firms with significant exposure to operating lease recognition. Further analyses show the effect is more pronounced for non-sophisticated funds, high-yield funds, issuers with more overestimated imputed interest rate (underestimated as-capitalized operating leases) and more complex leasing activities questioned by regulators. These findings suggest that active corporate bond funds fail to fully adjust for off-balance-sheet operating leases and underestimate credit risks of de facto riskier holdings under the legacy lease accounting standard. Operating lease recognition under ASC 842 alleviates the information-processing constraints faced by active corporate bond funds and enhances their ability to incorporate operating leases into their in-house fundamental credit analyses. This study is the first to highlight the impact of accounting reporting changes on the portfolio decisions of active corporate bond funds and provides evidence to FASB during its post-implementation review of the ASC 842
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