Terry Shevlin

ATA Doctoral ConsortiumFebruary 2013

Overview - Background Comments

Scholes and Wolfson* developed in response to

Do taxes matter?

Myers (1984)

If not, why not?

If so, how much?

(Maydew’s classic chicken slides)

Scholes: finance prof - Nobel prize winner for BSOPM

Wolfson: super-smart acctg prof who left academia to make money in late 80s.

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Overview - Scholes and Wolfson (1992)

Framework from SW

3 central themes

All parties e.g., compensation

Matsunaga, Shevlin and Shores 1992, raising capital

Miller 1977, Collins and Shackelford 1992

M&A Erickson 1998

All taxes - explicit and implicit Do prices reflect tax treatment?

All costs Financial reporting, agency costs,

transaction costs

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Overview - Scholes and Wolfson (1992)

Not a new theory

Is positive rather than normative

No paper really challenges the framework

Maintained assumption and used to structure tests

Relatively young field – when Doug and I wrote the JAE review on 2000.Thus documentationNot integrated empirical development

Changes in tax laws and data availability stimulate research questions AND still do.

See Hanlon and Heitzman JAE 2010 for more recent review.

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Tax and Nontax Tradeoffs

Taxes cannot be minimized without affecting other organizational goals

Taxes are not a cost that taxpayers inevitably avoid

Effects of financial reporting well studied

Quantification of nontax costs has progressed slowly

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Shackelford and Shevlin JAE 2001: Future Directions

More links to managerial accounting

Governance structure, management compensation and links to tax planning

Organizational form (decentralized vs centralized)

Agency conflicts with tax planning

Accounting for income taxes and links to tax planning

Do firms manage effective tax rates? What does this mean?

What determines firms’ tax-planning aggressiveness?

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Two big areas today, both revolving around tax avoidance

1. Determinants: family, exec compensation, private vs public, institutional ownership, corporate governance. ….

BUT basically examining cross-sectional variation in firms propensity to engage in more or less tax avoidance or tax planning and immediately you see we are really talking about the concept of effective tax planning….from SW. Thus the framework can help you think about the issues

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2. Consequences of tax avoidance (at the corporate level)

On firm valuePrice level regressionsLong window return regressionsShort window announcement studies

On cost of equityUsing implied cost of equity

On cost of debt

All these studies examine effects of cash tax savings vs nontax costs (mostly agency related) which are an important element in the SW framework

Desai and Dharmapala papers on agency costs but basically is this an important nontax cost of tax avoidance influencing both propensity to engage in and consequences thereof.

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Golden Oldies

Asset prices

Location decisions – role of financial accounting vs cash tax savings

Effects of financial accounting – FIN 48 studies

As you sit through various research presentations at this conference think about how the SW framework would help frame or help you think about the issue.

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So SW still relevant

Not as explicitly referenced now in studies (might have been over-referenced in 90’s and early 2000’s to give legitimacy to tax papers) but I think every student in this room would be well served to read the Shackelford and Shevlin 2001 JAE review piece (and the HH JAE 2010 piece) and time permitting to read the SW textbook to become very familiar with the concepts and ideas..

Questions, discussion?

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Why Did the Chicken Cross the Road?

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Because Taxes Were Lower on the Other Side

Low Taxes High Taxes

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Why Didn’t All the Chickens Cross the Road?

Low Taxes High Taxes

Crossing the Road Can Be Costly

Low Tax High Tax