Negative Special Items, Tax Rates, and the Income-Transfer Hypothesis

49 Pages Posted: 29 Mar 2007

See all articles by William M. Cready

William M. Cready

University of Texas at Dallas - Naveen Jindal School of Management

Thomas J. Lopez

University of Alabama - Culverhouse School of Accountancy

Craig A. Sisneros

Oklahoma State University

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

Cready, William M. and Lopez, Thomas J. and Sisneros, Craig A., Negative Special Items, Tax Rates, and the Income-Transfer Hypothesis (March 2007). Available at SSRN: https://ssrn.com/abstract=976816 or http://dx.doi.org/10.2139/ssrn.976816

William M. Cready (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Thomas J. Lopez

University of Alabama - Culverhouse School of Accountancy ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States
205-348-2907 (Phone)

Craig A. Sisneros

Oklahoma State University ( email )

Spears School of Business
397 Business Building
Stillwater, OK 74078-4011
United States
4057449718 (Phone)

HOME PAGE: http://https://business.okstate.edu/directory/sisneros-craig-833239.html

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