Terry Shevlin ATA Doctoral Consortium February 2015

The past: starts for me with Scholes and Wolfson 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. 2

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 3

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 4

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? ********* 5

Current: Four big areas today, two revolving around tax avoidance 1. Determinants of tax avoidance Family firms, exec compensation, private vs public, institutional ownership, corporate governance, manager fixed effects, religious, geneder,. …. 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 But area is saturated.... 6

2. Consequences of tax avoidance (at the corporate level) On firm value Price level regressions Long window return regressions Short window announcement studies On cost of equity Using 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 7

3. Multinational taxation Effects of US Worldwide tax system on US multinationals Investment location and repatriation decisions Income shifting Inversions Locked out earnings/trapped cash Agency problems 8

4. Accounting for income taxes and effects of financial reporting (grew out of the book-tax trade-off literature) Disclosure: temporary vs permanent differences Valuation allowance PRE APB 23 Effects of financial reporting on real decisions FIN 48 Book-tax conformity 9

The Future 10 Real effects of tax and accounting, with tax policy motivations International: BEPS Intangibles New data, new tax laws (exploit new data) Identification (new requirement: pooled c/s might not be enough anymore)

The Future 11 Collaboration: Across disciplines: accounting, economics, finance Across geography: North America, Europe, Asia The role of financial instruments...

12 Also be prepared to answer the basic question Why would not taxes matter here (Asked numerous ways: is it not obvious...., where is the tension... So think about the frictions and restrictions that might lead us to not observing a predicted result)

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.. 13