Accounting and Finance

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This is the collection for the University of Waterloo's School of Accounting and Finance.

Research outputs are organized by type (eg. Master Thesis, Article, Conference Paper).

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Now showing 1 - 4 of 4

The Effect of Canadian Tax Policy on Executive Equity Grants: Corporate Tax Planning and Managerial Power
(University of Waterloo, 2018-08-20) Hlaing, Khin Phyo; Chen, Changling; Klassen, Kenneth
This study examines how the tax treatment of corporate tax-deductible restricted share units and employee tax-favoured stock options at the employer and employee level affect the extent of their use in executive equity compensation packages among public firms. I appeal to two theories, namely, corporate tax planning and managerial power, to address the research question. I hand-collect executive compensation data of 143 top non-financial Canadian firms traded on the Toronto Stock Exchange for the 2005-2015 period. I find some evidence that firms expecting a high tax rate use the proportion of executive equity compensation via corporate tax-deductible RSUs to a greater extent compared to firms expecting a low tax rate at the vesting year. The results are consistent with the inference that managers demanding a higher level of employee tax-favoured options in their total equity compensation when they have power to influence the executive compensation. The results also support that managerial power weakens the positive association between firms expecting a high tax rate at the vesting year and the use of corporate tax-deductible RSUs in executive equity compensation. The findings suggest that tax policy that artificially distinguishes among types of equity compensation, such as the current Canadian legislation, affects executive equity compensation design.
Examinations of the Relations Between Tax-Motivated Income Shifting and Private and Public Country-by-Country Reporting
(University of Waterloo, 2024-08-09) Adams, Jillian; Klassen, Kenneth
Multinational corporations’ (MNCs’) tax-motivated income shifting concerns governments and policymakers worldwide. In this thesis, I examine how disclosure can address this concern by studying the relation between mandatory private country-by-country reporting (CbCR) disclosure, voluntary public CbCR disclosure, and MNCs’ tax-motivated income shifting. Extant research has failed to find robust evidence that mandatory private CbCR disclosure to the tax authorities has significantly decreased MNCs’ tax-motivated income shifting. These results have been widely cited and interpreted as evidence that MNCs’ income shifting did not decrease in the post-CbCR implementation period. I revisit this question by replicating the results of prior research, lengthening the sample period, and expanding the sample beyond the European Union. Using affiliate-level income shifting models, I find robust evidence that MNCs shift significantly less income in the post-CbCR implementation period. On average, MNCs have decreased their income shifting by half since the implementation of CbCR, and these decreases are monotonic across MNC size and not concentrated amongst MNCs subject to mandatory private CbCR. Altogether, I show that the objective of CbCR in reducing income shifting was achieved around the time CbCR was implemented; however, I provide compelling evidence that the CbCR consolidated revenue threshold did not matter, making it unlikely that it was the CbCR disclosure to the tax authorities that resulted in the decrease in income shifting. Consistent with the overarching focus of the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting (BEPS) framework, I find that MNCs headquartered in countries with strong regulatory environments, an interest deduction limitation consistent with BEPS Action 4, and no preferential tax regimes named in BEPS Action 5, exhibit greater decreases in income shifting relative to MNCs headquartered in countries with weak regulatory environments and not compliant with Action 4 or Action 5. These findings have important implications for governments and policymakers worldwide as they work to curb MNCs’ income shifting and implement BEPS action items. Then, I consider MNCs that voluntarily disclose CbCR publicly to determine whether this disclosure is a credible signal of their tax behavior. I use a unique hand-collected dataset of MNCs that disclose CbCR in their sustainability reporting, consistent with the Global Reporting Initiative’s sustainability-tax reporting standard. After explicitly modelling the endogenous disclosure decision and controlling for the post-CbCR implementation period, I find that MNCs that voluntarily disclose CbCR publicly significantly decrease tax-motivated income shifting in conjunction with disclosure, relative to the pre-disclosure period. The propensity for reduced income shifting is greater amongst MNCs that provide detailed CbCR disclosure, which is consistent with the costliness of such a detailed disclosure. Overall, I find that sustainability reporting is a mechanism within which MNCs differentiate themselves, consistent with a separating equilibrium, by demonstrating that the voluntary disclosure of complex tax information that is not easily verifiable can be a credible signal of the underlying tax behavior. This evidence has important implications for stakeholders interested in utilizing voluntary tax disclosures.
Tax Incentives in Corporate Acquisitions
(University of Waterloo, 2021-09-30) Warraich, Hamza; Bauer, Andrew; Klassen, Kenneth
In this dissertation, I examine tax incentives in corporate acquisitions. Reported tax losses or net operating losses (NOLs) under the United States (U.S.) income tax law have grown considerably in recent years. Yet, there is limited empirical evidence on whether target firms’ NOL carry-forward (NOLC), which is a potential tax asset, affects merger and acquisition (M&A) activity. I re-examine two open empirical questions in the literature for which there is limited or no empirical evidence. First, does the acquirer compensate the target’s shareholders for the target’s NOLC? I predict and find that the association between the target’s NOLC and acquisition premium is increasing in the acquirer’s marginal tax rate. Second, does the target’s NOLC affect how the acquisition is financed? Consistent with capital structure theory on the substitutability of debt and non-debt tax shields, I find that the probability of debt financing is relatively lower in deals in which the target has an NOLC. In accordance with the Scholes-Wolfson framework, of “all taxes, all parties, and all costs”, a key insight in this dissertation is that the tax and non-tax attributes of the target and acquirer firm interact to determine the available tax incentive and thus the optimal level of tax-planning. This dissertation also provides new insight into the distortionary effect of tax policy. NOLC-related tax incentives in corporate acquisitions are governed by Section 382 of the Internal Revenue Code. §382 imposes a loss limitation on firms’ tax attributes following an ownership change, effectively reducing the net present value (NPV) of the tax assets. Empirically, I document that the uncertainty inherent in the applicability of §382 rules increases the likelihood that a deal is cancelled. In addition, I find that §382 is an important determinant in the medium of exchange and that the applicability of loss limitation rules is a plausible explanation for the well-documented aggregate trend in the decline in the propensity of all-stock deals. My findings suggest that §382 creates serious and unintended distortions in the merger decision, the effects of which are economically large.
Tax-Planning vs. Coordination: The Dual Role of Internal Capital Allocation
(University of Waterloo, 2020-12-03) Xing, Bin (Betty); Klassen, Kenneth; Tian, Joyce (Jie)
In this thesis, I examine how a multinational corporation (MNC) allocates capital among its international subsidiaries. This capital allocation has both a managerial and tax-planning objective. On the managerial side, it serves to coordinate collaboration between two subsidiaries on an innovative opportunity. Because subsidiaries in different jurisdictions have different tax rates, this capital allocation also plays a role in international tax-planning. An analytical model reveals that the MNC trades off the benefits of collaboration on the innovative opportunity against the tax cost associated with doing do. I further examine the implication of this tradeoff on how an MNC changes its capital allocation in response to a tax cut. The model provides a counter-intuitive result that an MNC does not always increase the amount of capital allocated to the country giving a tax cut. This thesis contributes to our understanding of the interaction between the managerial and tax decisions of MNCs. It does so by studying the interaction in the context of the flow of subsidiary-specific intangible resources rather than the flow of physical goods. This thesis has implications for both managerial practices and tax policies. While the tax-rate differential between subsidiaries provides tax-planning opportunities, it also creates a coordination cost that is external to the organization. Finally, the results from this model highlight the importance of considering the interconnectedness of an MNC in assessing the effect of a tax policy.

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Browsing Accounting and Finance by Author "Klassen, Kenneth"