1. Terry Shevlin ATA Doctoral Consortium February 2013

2. Overview - Background Comments Scholes and Wolfson* developed in response to Do taxes matter? Myers (1984) If not, why not? If so, how much? (Maydews classic chicken slides) Scholes: finance prof - Nobel prize winner for BSOPM Wolfson: super-smart acctg prof who left academia to make money in late 80s. 2

3. Overview - Scholes and Wolfson (1992) Framework from SW 3 central themes All parties e.g., compensation Matsunaga, Shevlin and Shores 1992, raising capital Miller 1977, Collins and Shackelford 1992 M&A Erickson 1998 All taxes - explicit and implicit Do prices reflect tax treatment? All costs Financial reporting, agency costs, transaction costs 3

4. Overview - Scholes and Wolfson (1992) Not a new theory Is positive rather than normative No paper really challenges the framework Maintained assumption and used to structure tests Relatively young field – when Doug and I wrote the JAE review on 2000. Thus documentation Not integrated empirical development Changes in tax laws and data availability stimulate research questions AND still do. See Hanlon and Heitzman JAE 2010 for more recent review. 4

5. Tax and Nontax Tradeoffs Taxes cannot be minimized without affecting other organizational goals Taxes are not a cost that taxpayers inevitably avoid Effects of financial reporting well studied Quantification of nontax costs has progressed slowly 5

6. Shackelford and Shevlin JAE 2001: Future Directions More links to managerial accounting Governance structure, management compensation and links to tax planning Organizational form (decentralized vs centralized) Agency conflicts with tax planning Accounting for income taxes and links to tax planning Do firms manage effective tax rates? What does this mean? What determines firms tax-planning aggressiveness? 6

7. Two big areas today, both revolving around tax avoidance 1. Determinants: family, exec compensation, private vs public, institutional ownership, corporate governance. …. BUT basically examining cross-sectional variation in firms propensity to engage in more or less tax avoidance or tax planning and immediately you see we are really talking about the concept of effective tax planning….from SW. Thus the framework can help you think about the issues 7

8. 2. Consequences of tax avoidance (at the corporate level) On firm value Price level regressions Long window return regressions Short window announcement studies On cost of equity Using implied cost of equity On cost of debt All these studies examine effects of cash tax savings vs nontax costs (mostly agency related) which are an important element in the SW framework Desai and Dharmapala papers on agency costs but basically is this an important nontax cost of tax avoidance influencing both propensity to engage in and consequences thereof. 8

9. Golden Oldies Asset prices Location decisions – role of financial accounting vs cash tax savings Effects of financial accounting – FIN 48 studies As you sit through various research presentations at this conference think about how the SW framework would help frame or help you think about the issue. 9

10. So SW still relevant Not as explicitly referenced now in studies (might have been over-referenced in 90s and early 2000s to give legitimacy to tax papers) but I think every student in this room would be well served to read the Shackelford and Shevlin 2001 JAE review piece (and the HH JAE 2010 piece) and time permitting to read the SW textbook to become very familiar with the concepts and ideas.. Questions, discussion? 10

11. 11 Why Did the Chicken Cross the Road?

12. 12 Because Taxes Were Lower on the Other Side Low TaxesHigh Taxes

13. 13 Why Didnt All the Chickens Cross the Road? Low TaxesHigh Taxes

14. Crossing the Road Can Be Costly Low TaxHigh Tax