THE IMPACT OF OWNERSHIP CONCENTRATION ON THE TRADE-OFF BETWEEN FINANCIAL AND TAX REPORTING.

摘要

Optimal business decisions require managers to balance both tax and non-tax dimensions of alternative actions. Financial reporting is an important non-tax consideration for many managers who rely on financial markets to raise capital. This dissertation examines one influence, capital market pressure, that causes managers to trade off financial reporting and tax reporting incentives. Capital market pressure influences this trade-off because the emphasis on current financial reporting results increases the cost of (tax-motivated) income-reducing behavior.; This thesis hypothesizes that ownership concentration, one proxy for reduced capital market pressure, reduces the importance of financial reporting costs relative to tax reporting costs. Two empirical procedures are conducted to test this prediction.; The first test examines the specific decision of whether to sell assets with unrealized gains or losses. I hypothesize that because managers of widely-held firms feel greater market pressure, they accelerate earnings by selling winners prematurely and holding losers too long (relative to managers of closely-held firms). The results of tests using 336 divestitures are consistent with this hypothesis for the sub-sample of firms that face high tax rates.; The second test considers overall earnings and tests for differences in earnings-price ratios. If transactions and financial reporting choices are primarily motivated by current financial reporting objectives (rather than a tax reporting goal), earnings would generally be higher for a given performance level. Using a large sample, the tests find that firms with larger inside ownership concentrations have smaller earnings-price ratios, after controlling for size, anticipated growth and risk differences, consistent with the hypothesis.; There are several major contributions made by this dissertation. It is an ambitious attempt to document differences in managers' economic decisions resulting from the influence of ownership concentration on the trade-off of financial and tax reporting. It also explicitly considers the endogeneity of ownership concentration. Finally, it represents a detailed empirical test that supports the theoretical model of managerial myopia, developed by Stein.