This discussion reflects on the state and future of empirical tax research in accounting, complementing and extending the work of Shackelford and Shevlin ( J. Acc. Econom. 31/32 (2001)). Specifically, this discussion (1) examines the scope of Shackelford and Shevlin (J. Acc. Econom. 31/32 (2001)), (2) discusses what I view to be the main contributions and limitations in the extant tax research, and (3) charts several directions for future research.

Taxation, Earnings management, Net operating losses, Income shifting

[Implicit taxes reflect the extent (if any) to which tax-favored assets bear lower pretax returns than do tax-disfavored assets of similar risk. Prior research on implicit taxes has met with mixed results, particularly in equity securities, because of the difficulty in separating tax effects from effects caused by cross-sectional differences in risk. We avoid problems of risk by essentially comparing each security to itself before and after an unexpected change in the manner in which dividends are taxed to corporate investors. We find strong evidence of implicit taxes in preferred stocks. Extensive testing using the same event date indicates that no similar implicit tax effect exists in common stocks.]

We investigate the role of book-tax conformity in firms' financial reporting activities using a unique set of publicly traded firms that were forced to switch for tax purposes from the cash method to the accrual method. Prior to the mandated change, little trade-off existed between tax planning and financial reporting goals for these firms. After the change, recognition criteria for tax and financial reporting purposes became more alike, increasing the trade-off between financial reporting and tax objectives. Our results suggest that required use of the accrual method for tax purposes causes firms to defer income for financial statement purposes.

Abstract Implicit taxes reflect the extent (if any) to which tax-favored assets bear lower pretax returns than do tax-disfavored assets of similar risk. Prior research on implicit taxes has met with mixed results, particularly in equity securities, because of the difficulty in separating tax effects from effects caused by cross-sectional differences in risk. We avoid problems of risk by essentially comparing each security to itself before and after an unexpected change in the manner in which dividends are taxed to corporate investors. We find strong evidence of implicit taxes in preferred stocks. Extensive testing using the same event date indicates that no similar implicit tax effect exists in common stocks.

This paper estimates the magnitude of tax costs and their impact on the decision to divest assets via a taxable sale rather than a tax-free spin-off. We find that the tax costs are substantial, averaging 8% of market value of the divested assets, and that cross-sectional variation in tax costs has a large impact on managers’ choice of divestiture method. Our results are consistent with two explanations. First, managers are willing to incur avoidable tax costs to gain earnings and cash flow benefits. Second, managers choose taxable sales because the acquisition premia on the sales exceed the avoidable tax costs.

This paper examines changes in the information content of earnings over the past three decades using the two metrics from Beaver [1968]: abnormal trading volume and abnormal return volatility. We find no evidence of a decline in the information content of earnings announcements over the past three decades, as measured by both abnormal trading volume and return volatility around quarterly earnings announcements. If anything, our results suggest an increase over time in the informativeness of quarterly earnings announcements. Variables reflecting changes in firm‐specific factors account for a portion of the observed increase.

This paper investigates systematic changes in the value-relevance of earnings and book values over time. We report three primary findings. First, contrary to claims in the professional literature, the combined value-relevance of earnings and book values has not declined over the past forty years and, in fact, appears to have increased slightly. Second, while the incremental value-relevance of ‘bottom line’ earnings has declined, it has been replaced by increasing value-relevance of book values. Finally, much of the shift in value-relevance fiom earnings to book values can be explained by the increasing frequency and magnitude of one-time items, the increasing frequency of negative earnings, and changes in average firm size and intangible intensity across time.