ABSTRACT This study tests the joint prediction of the substitution effect and the tax exhaustion hypothesis that an increase in non‐debt tax shields leads to a decrease in leverage. Controls are introduced for the debt securability effect, the pecking order theory of financing, and the probability of losing tax shields. Using the relationship between changes in investment tax shields and changes in debt tax shields of firms in response to the Economic Recovery Tax Act of 1981, strong empirical support is found for predictions based on the substitution effect and the tax exhaustion hypothesis.

Examines analytical models of year-end purchasing decisions of a last in, first out (LIFO) firm. Prediction that LIFO firms are more likely to purchase extra inventory at year-end than first in, first out (FIFO) firms; Effect of taxes on the inventory purchasing policy of LIFO firms; Cost of goods sold management.

We find that a firm's dividend yield has a positive impact on its common stock return that is decreasing in the level of institutional and corporate ownership, our indicator of whether the marginal investor in a firm's common stock is more likely to be a low-tax or a high-tax investor. These results suggest that (1) a dividend tax penalty is incorporated into the return on a firm's common stock and (2) both a firm's dividend policy and its ownership structure impact the size of the dividend tax penalty.

LIFO Liquidation, Tax incentives, Debt covenants, Inventory valuation

With the exception of financial firms, we find no evidence that comprehensive income is more strongly associated with returns/market value or better predicts future cash flows/income than net income. Moreover, the only component of comprehensive income that improves the association between income and returns is the marketable securities adjustment. Our results do not support the claim that comprehensive income is a better measure of firm performance than net income. Our results also raise questions about the appropriateness of items included in SFAS 130 comprehensive income as well as the need for mandating uniform comprehensive income disclosures for all industries.

Guenther and Trombley (1994) and Jennings, Simko, and Thompson (1996) document a negative association between a firm's last‐in, first‐out (LIFO) reserve and the market value of its equity. In this paper, we test a deferred tax explanation of this negative association. Specifically, we argue that investors, conditional on adjusting inventory to as‐if first‐in, first‐out (FIFO), estimate a firm's future LIFO liquidation tax burden as its LIFO reserve multiplied by the appropriate corporate tax rate and include this tax‐adjusted LIFO reserve in the valuation of a LIFO firm's net assets. On the basis of this argument, the tax‐adjusted LIFO reserve is in effect an estimate of an off‐balance‐sheet deferred tax liability and, as a result, we predict a negative association between the tax‐adjusted LIFO reserve and market value of equity. We test our deferred tax explanation by estimating a valuation model in which a firm's market value of equity is expressed as a function of the firm's assets, liabilities, deferred tax liability, and tax‐adjusted LIFO reserve; the model is estimated separately in years preceding and following the reduction of tax rates mandated by the US Tax Reform Act of 1986. Test results provide strong support for the deferred tax explanation of the negative association between a firm's LIFO reserve and the market value of its equity.

ABSTRACT We test the relationship between the change in a firm's cost of debt and the disclosure of a material weakness in an initial Section 404 report. We find that, on average, a firm's credit spread on its publicly traded debt marginally increases if it discloses a material weakness. We also examine the impact of monitoring by credit rating agencies and/or banks on this result and find that the result is more pronounced for firms that are not monitored. Additional analysis indicates that the effect of bank monitoring appears to be the primary driver of these monitoring results. This finding is consistent with the argument that banks are effective delegated monitors for the debt market. The results of this study suggest the need for future research, particularly to test the differential effects of monitoring on the cost of debt compared to the cost of equity.