[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.]

Scholes et al. (2005) predict that S corporations, and other conduit entities such as partnerships and LLCs, can sell for a tax-driven purchase price premium relative to C corporations. We test this conjecture by comparing purchase price multiples in a sample of taxable stock acquisitions of S corporations to purchase price multiples for a matched set of taxable stock acquisitions of privately held C corporations. Consistent with Scholes et al.'s (2005) predictions, we find evidence that the organizational form of the target influences acquisition tax structure and acquisition price. Specifically, the evidence supports the conclusion that conduit entities (S corporations) fetch a taxbased purchase price premium relative to similar C corporations. Furthermore, our estimates indicate that average tax benefits in S corporation acquisitions are equal to approximately 12–17 percent of deal value.

This paper examines the implications of tax loss carryback incentives for corporate reporting decisions and capital market behavior. During the 1981 through 2010 sample period, we find that firms increase losses in order to claim a cash refund of recent tax payments before the option to do so expires, and we estimate that firms with tax refund-based incentives accelerate about $64.7 billion in losses. Tax-motivated loss shifting is reflected in both recurring and nonrecurring items and is more evident for financially constrained firms. Analysts do not generally incorporate tax-motivated loss shifting into their earnings forecasts, resulting in more negative analyst forecast errors for firms with tax-based incentives than for firms without. Holding earnings surprises constant, however, investors react less negatively to losses reported by firms with tax loss carryback incentives. Data Availability: Data are available from sources identified in the paper.

We analyze a sample of firms accused of fraudulently overstating their earnings and examine the extent, if any, to which they paid additional income taxes on the allegedly fraudulent earnings. Based on restatements of current tax expense adjusted for the tax benefits of stock options, the evidence indicates that many firms included the overstated financial accounting income on their tax returns, thus overpaying their taxes in the process of inflating their accounting earnings. We estimate that the median firm sacrificed eight cents in additional income taxes per dollar of inflated pretax earnings. In aggregate, we estimate that the firms in our sample paid $320 million in taxes on overstated earnings of about $3.36 billion. These results indicate how far managers of firms are willing to go when allegedly inflating earnings.