Firm and Investor Responses to Uncertain Tax Benefit Disclosure Requirements

2013 ◽  
Vol 35 (2) ◽  
pp. 85-120 ◽  
Author(s):  
Leslie A. Robinson ◽  
Andrew P. Schmidt
Keyword(s):  
Small Firms ◽  
Negative Association ◽  
Objective Measures ◽  
Disclosure Quality ◽  
Full Disclosure ◽  
Fin 48 ◽  
Proprietary Costs ◽  
Disclosure Requirements ◽  
Proprietary Cost ◽  
Jel Classifications

ABSTRACT We examine whether proprietary costs affect disclosure quality and how investors react to disclosure quality in a new proprietary cost setting. We apply Verrecchia's (1983) proprietary cost theory to the FIN 48 adoption setting and argue that proprietary costs result from beliefs that the new disclosures could weaken a firm's competitive position when negotiating with tax authorities. FIN 48 is an ideal setting to examine how proprietary costs affect disclosure given the proprietary nature of uncertain tax positions, and the ability to construct objective measures of both proprietary costs and disclosure quality. We construct disclosure quality scores for S&P 1500 firms and offer two empirical findings. First, we find a negative association between proprietary costs and disclosure quality. Second, investors reward firms for low disclosure quality, especially small firms and firms with high proprietary costs. Both findings are consistent with Verrecchia's (1983) theory, and suggest that proprietary costs moderate investor demand for full disclosure. JEL Classifications: G14, L15, M41, M44, M45

The Cost of Compliance: FIN 48 and Audit Fees

2015 ◽  
Vol 38 (2) ◽  
pp. 67-85 ◽  
Author(s):  
Matthew J. Erickson ◽  
Nathan C. Goldman ◽  
James Stekelberg
Keyword(s):  
Audit Fees ◽  
Temporary Increase ◽  
Audit Pricing ◽  
Fin 48 ◽  
Disclosure Requirements ◽  
Implementation Costs ◽  
Potential Benefits ◽  
The Cost ◽  
Jel Classifications

ABSTRACT Effective for fiscal years beginning after December 15, 2006, FIN 48 significantly altered uncertain tax benefit (UTB) recognition and disclosure requirements relative to its predecessor standard, FAS 5. We examine the effect of the new standard on audit pricing. We first document that UTB-related audit fees increased following the implementation of FIN 48. However, we also find that this increase is primarily driven by a spike in the audit pricing of UTBs in 2007. Indeed, we find that the audit pricing of UTBs in the 2008–2012 period is not significantly different from that of the 2002–2006 period. We interpret these results to indicate that although firms incurred significant FIN 48 implementation costs, the ongoing audit pricing of UTBs under FIN 48 is similar to that of FAS 5. Our findings suggest that any potential benefits of FIN 48 may outweigh associated costs related to a temporary increase in audit fees. JEL Classifications: H25; M40; M41; M42; M48.

scholarly journals Goodwill impairment test disclosures under IAS 36: Compliance and disclosure quality, disclosure determinants, and the role of enforcement

2019 ◽  
Vol 16 (1-1) ◽  
pp. 145-167
Author(s):  
Marius Gros ◽  
Sebastian Koch
Keyword(s):  
Voluntary Disclosure ◽  
Strategic Behavior ◽  
Disclosure Quality ◽  
Goodwill Impairment ◽  
Disclosure Requirements ◽  
Quality Disclosure ◽  
Low Levels ◽  
The Cost ◽  
Proprietary Cost

Prior research documented that higher disclosure quality reduces information asymmetry and the cost of capital. Accordingly, firms have an incentive to comply with disclosure requirements and to provide voluntary disclosure. However, prior research on mandatory disclosures on goodwill impairment testing reveals low compliance among European firms. In this paper, we contribute to the literature and assist regulators, enforcers, and standard setters by shedding light on the determinants of the observed low levels of compliance and voluntary disclosure. Consistent with economic theory, we reveal that firms determine the level of disclosure strategically. We find firms with higher preparation and proprietary cost to show lower compliance and less voluntary disclosure while firms with higher growth opportunities provide better compliance and more voluntary disclosure. However, the strategic behavior is constrained by enforcement. Consequently, our results are more (less) pronounced within a weak (strong) enforcement environment.

Managers’ stock-based compensation and disclosures of high proprietary cost information

2019 ◽  
Vol 32 (1) ◽  
pp. 96-124
Author(s):  
Luminita Enache ◽  
Jae Bum Kim
Keyword(s):  
Product Development ◽  
Stock Option ◽  
Small Sample ◽  
Cost Information ◽  
Content Type ◽  
Proprietary Costs ◽  
Related Information ◽  
Biotech Industry ◽  
Proprietary Cost ◽  
The Relationship

Purpose The purpose of this study is to examine whether chief executive officers’ (CEOs’) stock-based compensation has any relationship with disclosure of high proprietary information. Design/methodology/approach Drawing on agency and proprietary cost theory, this study examines whether compensating CEOs based on equity value through the grants of stock option and restricted stock will affect different firms with high proprietary costs versus general costs of disclosures. The authors further explore the cross-sectional variation on the relationship between stock-based compensation and disclosures of high proprietary cost information. In particular, the authors examine certain circumstances under which stock-based compensation has a stronger effect in discouraging managers to make disclosures of product-related information. This study conducts an empirical investigation on the relationship by using hand-collected data on the product-related disclosures of biotechnology firms and by developing new disclosure indices to capture the product developments in the preclinical and clinical stages. Findings The authors find that on average, managers’ stock-based compensation does not have any significant relationship with the proxy of high proprietary disclosure index. More importantly, the authors find that managers with more equity-based compensation (in the total pay) make fewer disclosures of high proprietary cost information when they have a stronger need to protect such information. Specifically, the authors find a negative relationship between equity-based compensation and managers’ disclosure of high proprietary cost information when their firms’ product development is in early stage, when the corporate board mainly consists of directors with lack of sufficient knowledge on technology, and when firms are a leader in an industry in terms of market share. Research limitations/implications The authors acknowledge two limitations of the current study. First, the authors cannot completely rule out the possibility that the results are still subject to endogeneity issues such as reverse causality or omitted correlated variables even though the authors control for other important variables that affect disclosures and granting of stock-based compensation (including firm size, leverage, analyst following, institutional ownership and corporate governance) and use the lagged variable of stock-based compensation in the regression model. Second, given that the authors examine a small sample (only 10 per cent of firms in the biotechnology industry) due to the required hand-collection of product-related information, the generalizability of the results may be limited. Originality/value The study contributes to the literature in two important ways. First, the findings can add to the literature on the effect of stock-based compensation on managers’ disclosures. While previous studies suggest that compensating via stock options and restricted stocks can incentivize managers in enhancing firm disclosures in general (e.g. Nagar et al., 2003), the authors provide evidence suggesting that it may not always be the case. When disclosing information involves high proprietary cost, stock-based compensation can sometimes motivate managers not to reveal information. The study also complements Erkens (2011), who finds that firms offer stock-based compensation to their managers as an attempt to prevent the leakage of research and development (R&D)-related information to competitors. Second, the study can contribute to the extant literature that examines the importance of proprietary costs on firms’ disclosure decisions. The authors attempt to respond to the call for more research in this area (Beyer et al., 2010) by focusing on one specific industry, the biotech industry and by using a novel proxy for the proprietary costs based on the stage of product development for a drug-related product in that industry. As it has been challenging for researchers to properly measure proprietary costs of disclosures, the setting of the biotech industry provides a particularly strong empirical identification to potentially pinpoint the proprietary costs.

The Importance of Full and Frank Disclosure in Family Law Financial Proceedings and the Many Consequences of Non-Disclosure

2017 ◽  
Vol 45 (1) ◽  
pp. 97-125
Author(s):  
Hugh P K Kopsen ◽  
Robyn Carroll
Keyword(s):  
Family Law ◽  
Civil Litigation ◽  
Court Decisions ◽  
Criminal Proceedings ◽  
Full Disclosure ◽  
High Court ◽  
Disclosure Requirements ◽  
The Family ◽  
The Many ◽  
Do So

This article examines the duty of full and frank disclosure of parties to family law financial proceedings in Australia, and the potential consequences of failure to comply with this fundamental obligation. The duty is briefly compared and contrasted with disclosure requirements in civil litigation and criminal proceedings to demonstrate the uniqueness of the family law position. The rationale and content of the duty is considered in light of recent cases including the High Court decisions of Stanford v Stanford (2012) 247 CLR 108 and Hall v Hall (2016) 257 CLR 490. The article presents a three-pronged taxonomy of the consequences of non-compliance with the duty, namely evidential, procedural, and final orders/related consequences. We conclude that the absolute nature of the duty and the comprehensive nature of the potential consequences of failure to make full disclosure mean that parties and legal practitioners do so at their peril.

Corporate governance and provisions under IAS 37

2017 ◽  
Vol 12 (1) ◽  
pp. 52-72 ◽  
Author(s):  
Ece Acar ◽  
Serdar Ozkan
Keyword(s):  
Developing Countries ◽  
Corporate Governance ◽  
Board Of Directors ◽  
Mandatory Disclosure ◽  
Full Disclosure ◽  
Content Type ◽  
Corporate Reporting ◽  
Concentrated Ownership ◽  
Disclosure Requirements ◽  
Institutional Owners

Purpose The purpose of this paper is to illustrate the extent of disclosure of provisions reported under IAS 37 provisions, contingent liabilities and contingent assets and explore the relation between provisions and corporate governance. Design/methodology/approach The current research utilizes a panel data analysis using a sample of 1,078 firm-year observations from Borsa Istanbul between the years 2005 and 2010. Findings Overall findings indicate that 62 percent of 1,078 firm-year observations recognize provisions, and among those, only 32 percent provide IAS 37’s full disclosure requirements. Firms that recognize provisions have larger board of directors and are more likely to be characterized with concentrated ownership and institutional owners. Also, firms with larger board of directors, greater independence and concentrated ownership have higher total provision/total debt ratios. Finally, firms that make full disclosure of provisions are more likely to have larger boards, higher ownership concentration and institutional owners and less likely to have CEO duality. Research limitations/implications As with all research, there are several limitations of this study. The study suffers from a lack of literature about provisions under IAS 37. The lack of literature directly focusing on provisions or IAS 37 appears to be one of the main limitations as well as one of the main contributions. Since this study focuses on one country, the comparison is not possible. Further research may contribute to literature by the use of other emerging economy’s capital market data. Moreover, further research can cover any other mandatory disclosure information specified in IASs/IFRSs and can provide comparative results about the compliance and strictness of the mandatory disclosure regime. Practical implications This study can be of interest to government, investors, business management, regulatory bodies, educators, researchers, accountants, auditors and scholars particularly in the field of accounting by seeking to make theoretical and practical contributions in the area of accounting disclosures and also serves as benchmark for future researches on corporate disclosures. Also this study provides significant insights to accounting regulators who set disclosure requirements. Originality/value Accurate corporate reporting is a necessary tool for the short- and long-term survival of the firms, hence the capital markets. Studying the level of disclosure will enable us to have additional insights about corporate reporting and will enhance the understanding of the nature of corporate reporting in developing countries. Disclosure practices by developing countries were empirically investigated in the past; however, the relation between provisions under IAS 37 and corporate governance has been unexplored in the literature. Thus, to the best of the authors’ knowledge, this is a pioneering research on provisions and corporate governance structure.

scholarly journals The influence of temporary differences between accounting and tax revenues, proprietary costs and liquidity on profit growth

2017 ◽  
Vol 12 (1) ◽  
pp. 64-83
Author(s):  
NURAMALIA HASANAH ◽  
RIDA PRIHATNI ◽  
AYUMASTUTININGSIH AYUMASTUTININGSIH
Keyword(s):  
Regression Analysis ◽  
Significant Influence ◽  
Quantitative Method ◽  
Stock Exchange ◽  
Secondary Data ◽  
Significance Level ◽  
Earnings Growth ◽  
Proprietary Costs ◽  
Independent Variable ◽  
Proprietary Cost

This study aimed to examine the influence of temporary differences between accounting profit and tax, proprietary costs, and Liquidity toward earnings growth of the companies listed in Indonesia Stock Exchange (IDX) 2011-2012. The factors examined in this study are temporary differences between accounting profit and tax, proprietary costs, and liquidity as an independent variable, while earnings growth has the dependent variable. This study used a descriptive quantitative method using secondary data and the number of samples collected was thirty- eight (38) that have met the criteria the researchers used purposive sampling. From the data that has been collected and then processed and analyzed using multiple regression analysis with a significance level of 0.05. This research proves temporary differences between accounting profit and tax has no significant influence on earnings growth, proprietary cost has no significant influence on earnings growth, and liquidity has negatively significant influence earnings growth. Temporary differences between accounting profit and tax, proprietary costs, and liquidity together or simultaneously significant influence toward the earnings growth.

Tangible Long-Lived Asset Impairments and Future Operating Cash Flows under U.S. GAAP and IFRS

2017 ◽  
Vol 93 (1) ◽  
pp. 187-211 ◽  
Author(s):  
Elizabeth A. Gordon ◽  
Hsiao-Tang Hsu
Keyword(s):  
Predictive Value ◽  
Cash Flows ◽  
Negative Association ◽  
Data Availability ◽  
Economic Factors ◽  
Negatively Associated ◽  
Operating Cash Flows ◽  
Reporting Incentives ◽  
Asset Impairments ◽  
Jel Classifications

ABSTRACT This paper investigates the predictive value of tangible long-lived asset impairments for changes in future operating cash flows under U.S. GAAP and IFRS. We find that impairments reported under IFRS are negatively associated with changes in future operating cash flows, whereas those under U.S. GAAP, on average, are not. We investigate whether differences in the predictive value are attributable to differences in recognition or measurement, providing evidence suggesting that impairment recognition under U.S. GAAP is delayed. Evidence also suggests that the value-in-use measurement attribute, allowed under IFRS, does not induce under-impairing as IFRS and U.S. GAAP impairments are similarly related to future impairments. The main result of a negative association under IFRS, but not U.S. GAAP, holds after considering future impairments to control for measurement differences, macro-economic factors, and firm reporting incentives. Further, impairment losses under IFRS are more predictive in high-enforcement countries. JEL Classifications: D78; F02; M16; M41; G38. Data Availability: Data used are available from sources identified in the paper.

Does the JOBS Act Reduce Compliance Costs of Emerging Growth Companies? Theory and Evidence

2019 ◽  
Vol 38 (4) ◽  
pp. 151-175
Author(s):  
Inder K. Khurana ◽  
Lei Zhao
Keyword(s):  
Initial Public Offering ◽  
Financial Reporting ◽  
Internal Control ◽  
Small Firms ◽  
Audit Fees ◽  
Significant Cost ◽  
Compliance Costs ◽  
Disclosure Requirements ◽  
Public Offering ◽  
Jobs Act

SUMMARY In April 2012, the Jumpstart Our Business Startups (JOBS) Act was enacted to revitalize the initial public offering market by reducing regulatory burdens for small firms. We focus on audit fees, one directly observable and significant cost of complying with the JOBS Act. Specifically, we examine whether the exemption of emerging growth companies (EGCs) from SOX 404(b) auditor attestations of internal control over financial reporting and other disclosure requirements affected audit fees paid by EGCs. We find that EGCs paid higher audit fees than non-EGCs after IPOs. Moreover, we find that the positive relation between EGCs and audit fees is more pronounced for firms with high financial reporting risk. Collectively, our results reveal an unintended consequence of the JOBS Act: it failed to reduce audit fees, a major component of the compliance costs of EGCs.

Proprietary Costs and the Reporting of Segment-level Tax Expense

2020 ◽  
Author(s):  
Junfang Deng ◽  
Fabio B. Gaertner ◽  
Daniel P. Lynch ◽  
Logan Steele
Keyword(s):  
Tax Avoidance ◽  
Current Accounting ◽  
Proprietary Costs ◽  
Accounting Rules ◽  
Current Guidance ◽  
Proprietary Cost ◽  
Specific Tax ◽  
Tax Expense

We examine whether proprietary costs of disclosure affect the reporting of segment-level tax expense. Current accounting rules for segment-level reporting afford managers significantdiscretion in what line items to report. We predict and find firms with higher proprietary costs of disclosure (i.e., higher tax avoidance) are less likely to disclose segment-level tax information. These results are stronger for firms that define business segments on a geographic basis, where disclosure could reveal tax expense information about specific tax jurisdictions, consistent with the proprietary cost hypothesis. Overall, our results suggest some managers potentially use discretion in current guidance to avoid segment-level disclosure of taxes when these disclosures have the potential to be detrimental to the firm.

Employee Turnover and Firm Performance: Large-Sample Archival Evidence

2021 ◽  
Author(s):  
Qin Li ◽  
Ben Lourie ◽  
Alexander Nekrasov ◽  
Terry Shevlin
Keyword(s):  
Firm Performance ◽  
Financial Performance ◽  
Stock Returns ◽  
Employee Turnover ◽  
Small Firms ◽  
Positive Association ◽  
Securities And Exchange Commission ◽  
Negative Association ◽  
Return On Assets ◽  
Future Performance

Employee turnover is a significant cost for businesses and a key human capital metric, but firms do not disclose this measure. We examine whether turnover is informative about future firm performance using a large panel of turnover data extracted from employees’ online profiles. We find that turnover is negatively associated with future financial performance (one-quarter ahead return on assets and sales growth). The negative association between turnover and future performance is stronger for small firms, for young firms, for firms with low labor intensity, when the local labor market is tight, and when the firm is trying to replace departing employees. The negative association disappears when turnover is very low, suggesting that a certain amount of turnover can be beneficial. Consistent with the concern that turnover increases operational uncertainty, we find a positive association between turnover and the uncertainty of future financial performance. Finally, we find a significant association between turnover and future stock returns, suggesting that investors do not fully incorporate turnover information. Our findings answer the call from the Securities and Exchange Commission to determine the importance of turnover disclosure. This paper was accepted by Brian Bushee, accounting.

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