DETERMINANTS OF THE CHOICE BETWEEN COMPREHENSIVE AND PARTIAL INCOME TAX ALLOCATION: THE CASE OF THE DOMESTIC INTERNATIONAL SALES CORPORATION.

摘要

The purpose of this study was to examine firms' motivations for choosing between comprehensive and partial allocation-alternative accounting methods for the extent of interperiod tax allocation. Based on the predictions of 'positive accounting theory', firms' choice was hypothesized to be related to variables that surrogate for potential debt covenant violations and their political visibility. In addition, auditors' preferences were hypothesized to affect the choice.; Domestic international sales corporations, a special type of corporation legislated into the Internal Revenue Code in 1971 to stimulate exports, provided a unique data set to empirically examine the determinants of the accounting choice. The legislation allowed an indefinite deferral of income taxes on a portion of the DISC's export earnings. However, for financial reporting, some firms provided taxes on those earnings (comprehensive allocators), whereas others did not (partial allocators).; The empirical analysis was conducted on a sample of 320 firms that had a DISC operational in 1972, 1973, or 1974. Statistical tests were performed in both univariate and multiple regression frameworks. Overall, the results indicate support for the debt covenant and auditor preference hypotheses, but only partial support for the political cost hypotheses. Consistent with the theory, firms with higher leverage and lower interest coverage ratios are observed to adopt partial allocation, an income-increasing method. However, a similar hypothesis based on dividend restrictions is not supported. In addition, no support is found for the hypothesis that because public debt involves higher renegotiation costs, firms with public debt are more likely to use partial allocation. Also consistent with the theory, firms with higher political costs manifest through higher effective tax rates are observed to adopt comprehensive allocation, an income-decreasing alternative. However, support for this hypothesis is weak. Another political cost hypothesis based on firm size is not supported. Finally, strong support is found for the hypothesis that firms' accounting method choice is related to the preferences of their auditors, a relatively new finding in the accounting method choice literature. The results generally were consistent across alternative definitions of the explanatory variables and sub-samples of firms by industry classification and the year when the DISC became operational.