Knowledge that Transforms

Multinational groups (MNGs) produce a major part of global output. Further, a substantial fraction of international transactions happens to be internal, i.e., intermediate products and services are traded between group members. Thus, the problem of co-ordinating economic decisions like investment or production within such large entities has been widely recog-nized in the theoretical and empirical literature. The findings suggest that transfer prices are a widespread device for splitting up complex decision situations and allocating the responsibility for the resulting subproblems to several decision makers. Apart from its co-ordination function transfer pricing is also used for tax purposes. Legally independent group members realize intra-group sales and contribute to a single product. Taxable group profits are often allocated among the participating companies by means of transfer prices. In this case, from the group's perspective, transfer pricing is a device of international tax planning. Of course, national tax authorities have been aware of potential misuse. In Europe, the problem has become especially severe since the mid-European countries joined the EU. Due to the emerging large tax rate differentials, tax revenues of high-tax legislations eroded. For mitigating this problem formula apportionment (FA) is discussed intensively. Under FA, a common tax base is calculated and divided among the host countries in accordance with given apportionment factors. As a consequence, earnings management fails to re-allocate profits to low-tax legislations and tax base erosion seems to be stopped. However, FA could even be more harmful than transfer pricing because under FA income shifting would require changing economic decisions instead of just taking advantage of accounting options. In addition to the erosion of tax revenues, capital investments and employment could decrease in high-tax legislations. The goal of our paper is to analyze the impact of different international tax allocation regimes on the MNG's investment and production decisions. In our theoretical model, we derive optimal decisions under transfer pricing and FA. A prominent result of our analysis is that FA offsets the advantages of decision decentralization as it reverses the separation of responsibility areas. It is not clear whether FA is desirable from a fiscal or an entrepreneurial perspective. We show that the effects of FA compared to transfer pricing depend strongly on the parameter setting under consideration. One of the most important determinants is the internal decision procedure within the MNG.

Contemporary Accounting ResearchVolume 29, Issue 2 p. 621-654 R&D Intensity and the Value of Analysts’ Recommendations* DAN PALMON, DAN PALMON Rutgers UniversitySearch for more papers by this authorARI YEZEGEL, ARI YEZEGEL Bentley UniversitySearch for more papers by this author DAN PALMON, DAN PALMON Rutgers UniversitySearch for more papers by this authorARI YEZEGEL, ARI YEZEGEL Bentley UniversitySearch for more papers by this author First published: 25 June 2011 https://doi.org/10.1111/j.1911-3846.2011.01117.xCitations: 30 † Accepted by Jeffrey Callen. We would like to thank Sudipta Basu (discussant), Jeffrey Callen (associate editor), Alia Crocker, Rani Hoitash, Pyungkyung Kang, Ann Medinets, Bharat Sarath, Ephraim F. Sudit, the anonymous referees of this Journal, and seminar participants at Bentley University, Lehigh University, Penn State at Great Valley, and the University of Delaware for their valuable comments and suggestions. We also benefited from comments of participants at the American Accounting Association 2008 Annual Meeting and American Accounting Association 2009 Northeast Region Meeting. This research was supported in part by a Faculty Research Grant from Rutgers Business School—Newark and New Brunswick. Ari Yezegel acknowledges the generous financial support provided by Bentley University through the FAC grant. All errors are the authors’ responsibility. Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume29, Issue2Summer 2012 (June)Pages 621-654 RelatedInformation

Using a sample of 231 firms in Hong Kong, Singapore, and Taiwan, we examine the changes in firms' accounting practice around leadership successions-the turnovers of chairmen. We find that the successions are associated with reduction in the firms' unsigned discretionary accruals and an increase in timely loss recognition. We argue that the incumbent chairmen cannot transfer most of their unique assets, such as reputation and political/social networks, to their successors, resulting in reduced relationship-based contracting post succession. This change from relationship-based to market-based contracting also shifts the firms to a less insider-based accounting system. Moreover, we find that the extent of the shift in accounting is larger in founder successions ( turnovers of chairmen that are founders) than in subsequent ( non-founder) successions, possibly because the loss of unique assets is more pronounced in the first succession than in subsequent successions.