Negative Special Items, Tax Rates, and the Income-Transfer Hypothesis
49 Pages Posted: 29 Mar 2007
Date Written: March 2007
Abstract
Burgstahler, Jiambalvo, and Shevlin (2002) evaluate the implications of special items for future earnings and report evidence consistent with the notion that firms use negative special items to accelerate the recognition of future period expenses. That is, negative special items serve as an income-transfer device. In this analysis, we examine additional predictions suggested by this income-transfer hypothesis not considered in their analysis. Specifically do the augmented future income values they report decline in future quarters as the transfer effect dissipates? Contrary to this prediction, we find that future income values increase in post-special-item quarters beyond the four quarters considered in Burgstahler et al. (2002). Thus, our results are more consistent with real future rewards to costly short-term business decisions than with income-transfer. We also find that the tax rate assumptions made in the Burgstahler et al. (2002) greatly impact the magnitude of the estimated special items future income effect. Utilizing an empirically derived tax rate, we find that the magnitudes of income increases associated with the recognition of negative special items are substantially smaller than those they report.
Keywords: Negative special items, income-transfer, tax rates, Restructuring
JEL Classification: M41, M43, H25
Suggested Citation: Suggested Citation
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