tax accounting principles and corporate risk taking we analyze the role of business taxation for corporate risk taking under different accounting principles such as mark to market lower of cost or market and historical cost we demonstrate that conservative accounting may imply incentives to overinvest in risky assets however with imperfect loss offsets the mark to market principle penalizes risky investment whereas more conservative accounting leaves the risk choice unaffected

dividend taxes corporate investment and q abstract taxes on corporate distributions have traditionally been regarded as a double tax on corporate income this view implies that while the total effective tax rate on corporate source income affects real economic decisions the distribution of this tax burden between the shareholders and the corporation is irrelevant recent research has suggested an alternative to this traditional view one explanation of why firms in the united states pay dividends in spite of the heavy tax liabilities associated with this form of distribution is that the stock market capitalizes the tax payments associated with corporate distributions this capitalization leaves investors indifferent at the margin between a corporation s decision to pay out dividends or to retain earnings this alternative view holds that while changes in the dividend tax rate will affect shareholder wealth they will have no impact on corporate investment decisions this paper develops econometric tests which distinguish between these two views of dividend taxation by extending tobin s q theory of investment to incorporate taxes at both the corporate and personal levels the implications of each view for corporate investment decisions can be derived the competing views may be tested by comparing the performance of investment equations estimated under each theory s predictions british time series data are particularly appropriate for testing hypotheses about dividend taxes because of the substantial postwar variation in effective tax rates on corporate distributions the econometric results suggest that dividend taxes have important effects on investment decisions

cointegration and the us term structure abstract using the maximum likelihood analysis of cointegration developed by johansen 1988 1991 we test the cointegration implications of the expectations hypothesis of the term structure on a sample of us pure discount yields by using this approach we are able to analyze systems of more than two interest rates simultaneously as opposed to most previous studies which examine interest rates only in pairs one of the main results is that for the period 1952 1987 the cointegration implications generally seem to hold

the importance of reporting conventions for the theory of corporate taxation abstract this paper shows that for the analysis of a tax policy it is important to be explicit about the reporting convention to which a corporation tax is required or allowed to adhere the paper shows that the corporation tax cannot be used to alter capital formation under uniform reporting a convention required by the majority of the oecd countries this tax is however a more useful policy tool in those oecd countries that have created the privilege of separate reporting fiscal depreciation makes the marginal valuation of equity differ from the marginal valuation of capital use of tax allowances directed to investment stimulus operates rather differently under the two reporting conventions

the incidence and allocation effects of a tax on corporate distributions abstract to study the effects of double taxation first at the corporation level then at the shareholder level this paper analyzes a model with a tax on all corporate distributions to equity owners and no other taxes contrary to the common view the tax is shown to have no subtitution effect and in particular no effect on the corporate choice between debt and equity via retained earnings finance the analysis opens to question certain arguments commonly used to support integration of corporation and individual income taxes via dividend relief

testing the expectations hypothesis in the brazilian term structure of interest rates a cointegration analysis in this article the expectations hypothesis eh is tested using cointegration techniques for maturities ranging from 1 to 12 months for the brazilian market we found evidence suggesting that for the period 1995 2006 the cointegration implication generally seems to hold we also found strong evidence supporting causality from short to long rates and also in the opposite direction empirical evidence supports the expectations theory of the term structure of interest rates

the vanishing harberger triangle this paper shows that the double taxation of corporate dividends or profit repatriations implies a nucleus theory of the corporation after the firm is set up with a small stock of original capital it enters a phase of purely internal growth during which no dividends are paid and no shares are issued the phase terminates when an efficient stock of capital has been accumulated and dividends are paid during the growth phases the tax distortion is inversely related to the tax burden and it is larger than conventional formulae for the cost of internal and external equity finance suggest

primary commodity prices and inflation primary commodities are products which have been only minimally processed agricultural foods which may either be directly consumed or form an input into the food processing industries industrial raw materials which may either be agricultural e g natural rubber or mineral mainly metals and most of important of all petroleum and petroleum products primary commodity prices are variable section ii and in part this variability is the result of macroeconomic fluctuations in the industrial ized countries rises in commodity prices will to a greater or lesser extent feed through into inflation

the term structure spread and future changes in long and short rates in the g7 countries abstract according to the expectations hypothesis when the spread between long and short rates widens next quarter s long rate should rise in the united states however long rates decline instead of rising this anomaly is also present in canada the uk germany and japan four of the additional six g7 countries nevertheless in contrast to the us where long rates appear to overreact to expected future developments the anomalous short run movement of long rates in these other g7 countries is caused by an additive white noise error on long rates that does not materially affect the information in their term structure

arch effects and cointegration is the foreign exchange market efficient abstract extensive empirical work has produced mixed evidence regarding the validity of the unbiased efficient expectations hypothesis in the foreign exchange market empirical analysis in this paper via cointegration techniques produces the same inconclusive results for three currency markets namely the ffr us the dm us and the yen us foreign exchange market however when modeling conditional heteroskedasticity of exchange rates through autoregressive conditional heteroskedasticity arch models the results are fairly conclusive the presence of the efficient foreign exchange market hypothesis is found in all these three currency markets

empirical research on accounting choice abstract we review research from the 1990s that examines the determinants and consequences of accounting choice structuring our analysis around the three types of market imperfections that influence managers choices agency costs information asymmetries and externalities affecting non contracting parties we conclude that research in the 1990s made limited progress in expanding our understanding of accounting choice because of limitations in research design and a focus on replication rather than extension of current knowledge we discuss opportunities for future research recommending the exploration of the economic implications of accounting choice by addressing the three different reasons why accounting matters

commodity market stabilisation and north south income transfers an empirical investigation abstract commodity stabilisation agreements have often been suggested as a means of stabilising producers revenues and redistrubuting productive resources to less developed economies from north to south but no empirical estimates of how much may be expected from such agreements nor of what they would cost to operate have appeared this paper examines in the context of one market how far prices can be stabilised by buffer stock interventions the costs of that stabilisation and whether any redistribution would be achieved we find pure stabilisation leads to transfers away from the south and that supply restrictions which force redistribution are extremely expensive however it is relatively cheap to protect producers on the south against the uncertainty of future revenues

futures trading and the welfare evaluation of commodity price stabilisation it is notorious that commodity prices are volatile and there is a substantial literature on the wisdom of complete or partial elimination of this volatility the modern academic literature starts from waugh i944 who argued that consumers benefit from price volatility since they can take advantage of low prices by increasing consumption and oi i96i who argued the parallel proposition for producers massell i969 noting that waugh had assumed supply side disturbances whilst oi had assumed demand side disturbances provided an integrated model in the same spirit samuelson i972 showed that notwithstanding the contributions of waugh and oi it will not be beneficial within a standard competitive market clearing model to destabilise prices the literature is surveyed in turnovsky i978 this raises the question of whether stabilisation can be justified in the context of a competitive free market in which private agents make optimal stockholding decisions wright and williams i982 a number of authors see for example johnson i967 ch 5 have suggested that the fundamental theorem of welfare economics rules out such intervention standard arguments that would qualify this conclusion are superior governmental access to capital markets or information and the assertion that stabilisation may result in a favourable redistribution of income newbery and stiglitz i98i have stressed the rather more powerful argument that application of the fundamental theorem of welfare economics in an uncertain and explicitly intertemporal context requires the existence of a complete set of forward and contingent contracts markets futures or forward markets do exist for delivery of many important primary commodities at near dates but this is far from sufficient to satisfy the prerequisites of the theorem since agents will use those markets which do exist as substitutes for those that are absent since for example moral hazard considerations prevent widespread trading of crop insurance contracts farmers are obliged to obtain insurance against poor crops through the imperfect substitute of hedging on futures markets the limited range of futures and contingent claims markets invalidates the argument that intervention can never be justified in welfare terms but at the same time this only establishes the possibility of a justification for intervention a specific case must be made for each market futures trading allows market transactors to fix their prices in advance of delivery for example a farmer may completely hedge by selling his entire

taxes investment and q this paper attempts to provide a unified analysis of the effects of taxation on the equilibrium value of marginal q under alternative financial policies it is shown that the q approach does not avoid all the specification problems associated with analyses based on the cost of capital the theoretically and empirically crucial relationship between average and marginal q is also examined and it is shown that under uk and us tax rules the possibility of winding up precludes persistent undervaluation in equilibrium there have now been a considerable number of empirical studies of investment behaviour based on some variant of tobin s q defined as the ratio of the firm s market value to the value of its capital stock see for instance jenkinson 1981 oulton 1981 poterba and summers 1981 summers 1981 and von furstenberg 1977 the q approach is seen as having the empirical advantage compared in particular with the more traditional approach based on the cost of capital of allowing expectations to be brought directly into the study of investment behaviour by relying on asset prices to digest all relevant expectations and reflect them in observable data an immediate difficulty however is that whilst the incentive to invest is related to the effect on shareholder wealth at the margin and hence to marginal q only the value of average q is directly observable the consequent difficulty of implementation is not however considered here see bailey and scarth 1980 and hayashi 1982 for discussion of conditions under which marginal q can be inferred from average q rather this paper is concerned with the prior question of how personal and corporate taxation affects the equilibrium value of marginal q for there has as yet been no systematic analysis of the effects of taxation on the equilibrium value of marginal q comparable with the analysis of the relationship between taxation and the cost of capital in king 1974 thus auerbach 1979a b bradford 1981 and edwards and keen 1984 have all considered how taxes affect q when the marginal source of funds is either retained profit or the sale of new equity and the distinction between these two cases has also been recognized in the empirical work of poterba and summers 1983 but the important case in which debt is the marginal source has been ignored the effects on marginal q of the constraints that typically need to be imposed in modelling financial policy have also been neglected this paper attempts to fill these gaps in the literature by providing a general analysis of the relationships between taxation financial policy investment and q the paper also examines the implications of the special tax provisions that may apply in the event in the firm s ceasing operations winding up this bears upon one of the unresolved issues associated with the new view of equity finance auerbach 1983 namely the suggestion that if dividends are taxed more heavily than capital gains

testing the expectations hypothesis in eurodeposits abstract analyzing data on euro rates for 1978 1998 we find some consistent evidence in favor of the expectations hypothesis eh of the term structure a interest rates offered on deposits in a given currency form a cointegrated system b the restrictions of the eh on the cointegrating relationships are not rejected c forward rates contain significant explanatory power on future interest rates unbiasedness being an acceptable hypothesis as a cointegrating relationship between forward rates and the appropriate future value of the corresponding short term interest rate however we also provide evidence that past rates contain information additional to that in forward rates to predict future short term rates against the rational expectations version of the eh and market efficiency

a multicountry comparison of term structure forecasts at long horizons abstract this paper extends previous work on the information in the u s term structure at longer maturities to britain west germany and switzerland we find strong evidence that the term structure does have significant ability to forecast changes in inflation particularly at long maturities on the other hand the ability of the term structure to forecast changes in one year interest rates is somewhat weaker only at the very longest horizon five years is there significant forecasting ability for interest rate changes

the economic role of commodity storage one of the earliest and most successful exainples of economic policy is the oftquoted biblical account of joseph s interpretation of the pharoah s dream joseph foretold that seven years of abundant harvests would precede seven years of drought and recommended that the pharoah accumulate grain during the good years since that time the central role of storage in stabilising the economy in the face of exogenous disturbances has been obvious but our understanding of the nature of that role has not greatly advanced without divine assistance in forecasting stochastic production the storage decision is considerably more complex than the one joseph faced and the role of storage quite different in fact several commonly held impressions about the role of storage of commodities such as grains are incorrect rather than stabilising production storage actually accentuates its variability rather than causing a mean price preserving decrease or a mean output preserving decrease in the dispersion of price storage generally causes a more complex modification of the distribution of price rather than being most effective at eliminating short falls in consumption storage actually is more effective at eliminating the incidence of exceedingly high consumption in this paper we explore the role of storage in a model where production is stochastic and both production and storage are performed by competitive profitmaximisers who form rational expectations about the returns to their activities we derive the subtle but very important interactions among production price expectations and storage which simpler models cannot capture finally we make a comparative statics assessment of the distributional implications of storage these results while confirming the importance of the specification of the demand function and the supply elasticity identified in recent analytical studies e g wright i979 and newbery and stiglitz i979 are surprisingly favourable to consumers considering the asymmetric nature of the effects of storage on consumption and price storage is simply a productive activity one that transfers a commodity from one period to the next like other forms of production it is costly the total cost of storing an amount st from period t to period t i is as of period t i

corporation tax finance and the cost of capital this paper examines the influence of corporate tax exhaustion on the firm s financial and investment decisions a dynamic programming model is used to establish effective marginal tax rates in the presence of a tax system that permits the carry forward of losses to future periods the paper demonstrates that internal optimal financial structures may result which do not require the imposition of external constraints the cost of capital is highly sensitive to the current taxable earnings of the firm and the implications of this for such tax transfer activities as leasing are discussed

time variation in term premia international survey based evidence using a large previously unexplored data set of survey based interest rate forecasts that covers a broad range of countries this paper re examines the expectations hypothesis of the term structure of interest rates we find that survey based interest rate forecasts outperform not only a random walk forecast but also outperform forecasts from forward rates when using these superior survey based forecasts in a modified expectations hypothesis test the expectations hypothesis is rejected for fewer countries at lower significance levels and has greater explanatory power than when using a traditional forward rates based test we furthermore document strong time variation in the term premia which is an important reason why the traditional expectations hypothesis test is rejected so frequently this time variation seems to arise from the changing attitudes towards risk among market participants and as a compensation for the change in liquidity in the term structure finally we find that generalizing findings from earlier u s studies to other countries may lead to bias in the true economic relationships in these countries

the information content of eonia swap rates before and during the financial crisis abstract before august 2007 implied forward rates in the overnight interest swap rates closely reflected market expectations about the future path of the eonia and therefore about the future course of the ecb s monetary policy stance nevertheless this link was weakened considerably during the most acute episode of the financial crisis using the expectations hypothesis of the term structure as a benchmark model for the determination of the overnight interest swap rates we find that after may 2010 the monetary transmission mechanism was partially restored when the ecb implemented various unconventional measures in response to the financial crisis on the contrary liquidity and credit risks are still present in unsecured deposit markets distorting the pricing and transmission of the ecb monetary policy stance along the euribor rates these results should be of interest for regulators financial institutions and researchers in european money markets

accelerated depreciation and the cost of capital the effects of various investment incentives particularly accelerated depreciation on the cost of capital of a profit maximizing firm have been widely discussed during the last few years recent contributions include those of sandmo 1974 bergstrom 1976 boadway 1978 and alworth 1979 a shortcoming of these contributions however is that few efforts are made to provide economic interpretations of the results obtained in this note i derive the cost of capital in a simplified way in terms of a standard marginal investment project the emphasis is on explaining the effects of accelerated depreciation on capital cost in economic terms the deferral of corporation tax brought about by acceleration of depreciation allowances is often compared to the acquisition of an interest free loan from the treasury the deferred corporate tax is thus regarded as a source of finance to the firm it turns out that the effects of accelerated depreciation on capital cost may well be interpreted in a way that conforms to this intuitive view of tax deferral by means of a general expression for capital cost as a weighted average of the costs of debt and equity the deferred corporate tax may be conceived of as a substitute for either equity or debt or both

optimal stockpiling in a high risk commodity market the case of copper abstract economists recognise the need for making decisions which are sensitive to risk but they have been unable to compute the decisions which satisfy the von neumann morgenstern theory of choice under risk in a multivariable dynamic context this paper explores sequential decision rules which optimise a second order approximation to von neumann morgenstern utilities with arbitrary probability distributions and intertemporal stochastic dependence these rules are used to generate optimal stockpiling rules for stabilising the price in a high risk commodity market a clear trade off emerges between the ambition and security objectives of market management

the treasury yield curve as a cointegrated system this paper examines the temporal relationship between interest rates on treasury securities ranging in maturity from three months to 30 years we find strong empirical support that the seven treasury rates selected are cointegrated a conclusion that is insensitive to the normalization chosen in particular the hypothesis of noncointegration is rejeeted decisively regardless of the rate selected as the dependent variable in the cointegrating equation to determine whether this information can be used to improve forecasts of treasury rates the seven rates are forecasted with a corresponding erroreorrection model that is shown to outperform an augmented var model that ignores the cointegration of the rates the results are consistent with the belief that arbitrage limits the extent to which rates on different maturities of a given security diverge in addition the results confirm the appropriateness of imposing a common stochastic process for interest rates in equilibrium models of the term structure

policy options for stabilizing earnings in a speculative market a structural analysis abstract this paper examines the impact of price stabilization or price supports and different forms of supply controls on the earnings distribution in a speculative commodity market both strategies lead to a conflict in which greater earnings stability has to be brought with lower average earnings neither on its own can help reduce the probability of periods with loss earnings or large disturbances but it is shown how combinations of these two strategies may be used to gain stability while reducing those probabilities and maintaining the earnings level

commodities and development some issues abstract this paper provides a review of a range of issues relating to the relationship between primary commodity markets and the process of economic development as such it provides a backdrop against which the various essays contained in this special issue may be seen

the term structure of euro rates some evidence in support of the expectations hypothesis abstract this paper studies 1 3 6 and 12 month euro rates for 17 countries using between 10 and 30 years of data term spreads contain information about future short term rates in all 51 regressions that we estimate moreover in 35 cases we are unable to reject the expectations hypothesis using cross sectional regressions we estimate the variance of the term premium and the correlation of the term premium and the expected change in short rates we conclude that despite evidence of a time varying term premium for many countries the expectations hypothesis is broadly compatible with the data

real effects of accounting rules evidence from multinational firms investment location and profit repatriation decisions we analyze survey responses from nearly 600 tax executives to better understand corporate decisions about real investment location and profit repatriation our evidence indicates that avoiding financial accounting income tax expense is as important as avoiding cash income taxes when corporations decide where to locate operations and whether to repatriate foreign earnings this result is important in light of the recent research about whether financial accounting affects investment and in light of the decades of research on foreign investment that examines the role of cash income taxes but heretofore has not investigated the importance of financial reporting effects our analysis suggests that financial reporting is an important factor to be considered in the policy debates focused on bringing investment to the united states