This study documents one effect of the theory of implicit taxes, providing evidence that a change in the tax rate results in a change in pre-tax returns. Yield spreads of pairs of Treasury bills maturing in the last week of December and the first week of January are examined. Year-ends not affected by rate changes show a significant positive yield spread between these pairs of bills, reflecting an upward-sloping yield curve. However, for year-ends coinciding with the tax rate reductions of 1981 and 1986 there is a significant negative yield spread between these pairs of bills.

[This study investigates whether accounting earnings of U.S. corporations are managed in response to changes in the statutory corporate income tax rate. The Tax Reform Act of 1986 (TRA) reduced the maximum corporate tax rate from 46 percent to 34 percent. If managers attempt to maximize firm value by minimizing tax costs, this tax rate change would have provided a substantial incentive to defer income. The motivation for this study comes from attempts by previous researchers to identify situations in which incentives to manage earnings exist and to find empirical evidence of such management (Healy 1985; DeAngelo 1986; Liberty and Zimmerman 1986; McNichols and Wilson 1988; Jones 1991; Cahan 1992). Evidence of earnings management is examined by focusing on accounting accruals. As pointed out by Manzon (1992) and Choi et al. (1991), total accruals can be separated into those types of accruals that are not expected to have a significant effect on taxable income (called "non-current accruals," e.g., depreciation) and those types of accruals that are expected to affect taxable income (called "current accruals," e.g., accounts receivable, accrued payables). By knowing exante which types of accruals are most likely to affect tax savings, more powerful tests of tax motivated earnings management are possible. Firms expected to reduce financial statement income to achieve tax savings are large firms, firms with low levels of long-term debt, and firms with high levels of manager ownership. While the reduction in corporate tax rates provided an incentive for managers to decrease financial statement income in the year prior to the effective date of TRA, other incentives might make it costly for managers to do so. For this reason, many firms may choose to forego a current tax savings to avoid reducing financial statement net income. The results of empirical tests report significantly lower current accruals for large firms for the year prior to the tax rate reduction.1 As predicted, these accruals are positively associated with levels of long-term debt. There is no relation between accruals and manager ownership. Accruals for large firms with years ending 30 June are not lower than those of calendar year firms. This study provides evidence of management of financial statement income in response to a large decrease in the statutory corporate tax rate. The results have implications for independent auditors, who face conflicting incentives to (1) provide clients with tax minimization advice, and (2) detect material cases of client earnings management. The results are also expected to be of interest to tax policy decision makers, since the ability of corporate managers to engage in tax rate arbitrage through earnings management can affect revenue estimates, as well as estimates of effects of tax law changes.]

Investigates whether accounting earnings of American corporations are managed in response to changes in the statutory corporate income tax rate brought about by the Tax Reform Act of 1986 (TRA). Reducing the maximum corporate tax rate from 46% to 34% through TRA; Concept of earnings management in relation to tax rate reductions in the TRA.

Differences between SIC codes assigned to companies by COMPUSTAT and CRSP are examined. Large differences are observed at two-, three-, and four-digit levels. Correlations of intra-industry monthly stock returns are larger, and variances of intra-industry financial ratios are smaller for industries based on COMPUSTAT codes. Replication of a portion of Freeman and Tse (1992) produces significant results using COMPUSTAT codes, consistent with the original research, but insignificant results for CRSP codes.

A valuation approach is used to examine the effect of the LIFO inventory method on the relation between the market value of a firm's stock and the book value of equity. The paper develops three competing hypotheses that have different predictions regarding the relation between the LIFO reserve and the market value of equity. Results indicate a significant negative relation between the LIFO reserve and the value of equity, inconsistent with the pricing of LIFO reserves as unbooked assets, but consistent with a model that views the LIFO reserve as a measure of the effect of increases in factor input prices on firm value. Résumé. Les auteurs ont recours à une évaluation pour examiner l'incidence de la méthode DEPS de détermination du coût des stocks sur la relation entre le cours de l'action d'une société et sa valeur comptable. Ils élaborent trois hypothèses concurrentes qui débouchent sur des prédictions différentes en ce qui a trait à la relation entre la réserve résultant de l'utilisation de la méthode DEPS et la valeur marchande de l'entreprise. Les résultats indiquent une relation négative significative entre cette réserve et la valeur comptable de l'entreprise, relation qui ne concorde pas avec le prix de ladite réserve que l'on voudrait assimiler à un actif non comptabilisé, mais qui cadre avec un modèle selon lequel la réserve résultant de l'utilisation de la méthode DEPS est considérée comme une mesure de l'incidence des hausses du prix des intrants sur la valeur de l'entreprise.