We examine whether tax incentives influence where U.S. multinationals locate their interest deductions worldwide. Our sample includes international bond offerings by U.S. multinationals during 1987–1997 denominated in the currencies of Australia, Canada, France, Germany, Italy, Japan, or the United Kingdom. Our results suggest that U.S. multinationals’ debt location decisions take into account the effect of jurisdiction‐specific tax‐loss carryforwards and binding foreign tax credit limitations on the value of debt tax shields. Our results are also consistent with U.S. multinationals locating interest deductions in different tax jurisdictions as a mechanism to achieve tax‐motivated income shifting.

LIFO Liquidation, Tax incentives, Debt covenants, Inventory valuation

We examine the associations among leverage, corporate and investor level taxes, and the firm's implied cost of equity capital. Expanding on Modigliani and Miller [1958, 1963], the cost of equity capital can be expressed as a function of leverage and corporate and investor level taxes. Based on this expression, we predict that the cost of equity is increasing in leverage, and that corporate taxes mitigate this leverage-related risk premium, while the personal tax disadvantage of debt increases this premium. We empirically test these predictions using implied cost of equity estimates and proxies for the firm's corporate tax rate and the personal tax disadvantage of debt. Our results suggest that the equity risk premium associated with leverage is decreasing in the corporate tax benefit from debt. We find some evidence that the equity risk premium from leverage is increasing in the personal tax penalty associated with debt.

We estimate firm‐level implied cost of equity capital based on recent advances in accounting and finance research and examine the effect of dividend taxes on the cost of equity capital. We investigate whether dividend taxes affect firms' cost of capital by testing the relation between the implied cost of equity capital and a measure of the tax‐penalized portion of dividend yield, which we define as the product of dividend yield and the dividend tax penalty. The results generally support the dividend tax capitalization hypothesis. We find a positive relation between the implied cost of equity capital and the tax‐penalized portion of dividend yield that is decreasing in aggregate institutional ownership, our proxy for tax‐advantaged investors. The evidence in this study adds to the understanding of the effect of investor‐level taxes on equity value.

We investigate whether management's decision regarding the recognition of the valuation allowance (VA) for deferred tax assets provides incremental information about the persistence of accounting losses. We introduce a classification scheme that assigns loss firm‐years into three categories based on whether management appears to have recognized a material change in the VA, and whether or not the firm has positive taxable income (e.g., a net operating loss). The results of our study show that our tax categories contain information about the persistence of accounting losses over the following three years beyond variables previously identified to predict loss persistence. This incremental information is consistent with management using private information about the firm's future prospects in setting the VA. Finally, we find that investors’ pricing of the VA varies with the saliency of the tax signal and the information environment of the firm.