Abstract
The use of assumed tax rates to adjust special items (e.g., restructuring charges, asset writedowns, etc.) is common in empirical accounting research as these items are reported pre-tax and are often used in research designs that include after-tax earnings. This study explores the potential empirical consequences of assuming an incorrect tax rate in adjusting special items. We focus on special items given their prevelance in the literature as well as the wide variation in tax rate assumptions from these studies. Our investigation shows that the tax rate assumed can be critical to the interpretation of results. Importantly, our evidence suggests extreme tax rate assumptions, in particular the highest statutory rate, are especially problematic and yield dramatically biased estimates. Our review of the tax consequences of special items suggests that, in almost all circumstances, the marginal tax rate is the theoretically correct rate to apply to these items when adjusting for tax. Consistent with this view, our empirical evidence, with a limited exception, suggests that marginal tax rates represent the best estimate of the true tax rate. By providing empirical evidence on the potential empirical consequences of these varied tax rate assumptions, we offer a guide for future researchers on the importance of this critical design choice.
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Notes
Compustat classifies material nonrecurring items that are reported above the line as ‘‘special items” and reports aggregate special items on a pre-tax basis. Special items include such items as restructuring charges, asset impairments, plant closing costs, and termination benefits. We discuss special items in greater detail in the next section.
The tax rate adjustment is to multiply the reported special item by (1-t) where t is the assumed tax rate. Assumed tax rates include zero (no adjustment), the top statutory rate, an estimated marginal rate, a calculated effective tax rate, or using after-tax special item components in Compustat (added in 2001 and discussed further below).
We discuss our method for identifying these studies in greater detail in the literature review section.
Our own analysis finds that the annual reporting of special items almost doubled between 2000 and 2017.
Commonly known as “persistence” of earnings, though persistence becomes confusing when dealing with negative special items. Burgstahler et al. (2002) use the term “inter-period” transfer, and Cready et al. (2012) use the term “expense” transfer as the latter study focuses solely on negative special items. We use the term “income” transfer throughout as encompassing the fact that special items may include gains, losses, revenues, and expenses.
“Income-transfer” refers to firms transferring current or future normal operating expenses (revenue) into special items, thereby increasing (decreasing) current or future earnings before special items (Burgstahler et al. 2002, pp. 590–591).
We examined the tax footnote of 25 randomly selected large pure restructuring charge observations (where the charge was the only special item reported and at least 1 percent of assets). As reported in Appendix 2, Panel C, of these 25 observations, 22 report negative pre-tax income, and the mean (median) deferred tax valuation allowance for these observations is 65 (88) percent of the deferred tax asset.
If the deferred tax valuation allowance equals 100 percent of the deferred tax asset, management’s expectation of future income is insufficient to realize the deferred tax asset, assuming that management’s estimate of future taxable income is unbiased. However, research shows this allowance may be managed (e.g., Frank and Rego 2006).
However, this situation is complicated by different deductibility rules depending on how the goodwill is acquired. Although most goodwill is nondeductible (i.e., goodwill recognized through stock acquisitions), a nontrivial amount of goodwill is amortized for tax purposes (i.e., goodwill obtained in cash acquisitions).
Quarterly changes in earnings have the largest effect on future earnings in the fourth subsequent quarter, reflecting the seasonality of quarterly earnings. Thus, in the income-transfer model, the largest influence of a special item on future earnings will be reflected in the fourth subsequent quarter. See page 599 Burgstahler et al. (2002) for a thorough discussion.
We discuss the effect of valuation allowances in Section III and potential explanations for the restructuring sample differences along with the results of the restructuring subsample tests in Section V.
Shielding is the degree to which compensation committees add a negative special item back to income before setting earnings-based bonuses. Full shielding implies that 100 percent of the charge is added back, no shielding implies that none of the charge is added back, and partial shielding implies that part of the charge is added back. See Dechow et al. (1994, p. 142) for a full discussion of how empirical results are interpreted as no, partial, or full shielding.
To avoid citation inflation, all 71 papers are not included in the reference section but are available from the authors upon request. We only include references for papers directly cited in the manuscript.
A recent study by Cain et al. (2020) in Management Science also provided a relatively comprehensive list of special items research. This process may have resulted in omissions, but the studies identified are used for descriptive purposes and context on the relevance of special items and tax adjustments in published research. Furthermore, this list does not include studies similar to the work of Doyle et al. (2003), who define special items other than the Compustat provided variables, or studies that use incidence of special items solely as a partition or indicator.
To clarify, PTB matches both pre-tax earnings to the reported special item (measured pre-tax). The ZERO assumption matches after-tax earnings with pre-tax special items, seemingly mismatching special items and earnings. While some studies explicitly assume a zero tax rate (e.g., Dechow and Ge 2006), others are silent but the inclusion of special items as reported with after-tax earnings implicitly assumes a zero tax rate. That said, this may be the appropriate assumption in certain circumstances, as we discuss and investigate below.
Since many studies include more than one analysis/dependent variable, the total adds up to 108 dependent variables in the 71 identified studies.
The income-transfer model in its simplest form is based on the work of Bernard and Thomas (1990), who demonstrate that the predictable relation between current and future quarterly earnings is not fully impounded in prices.
These inferences are of course reversed when the actual tax rate exceeds the true tax rate. This is unlikely when the top statutory rate is used but possible when a zero rate is assumed.
Our observations suggest Compustat generally assumes the highest statutory rate (TOP) with exactly 35% assumed for over 70 percent of our sample of special item observations. The zero tax rate (ZERO) is assumed for approximately 10 percent of our sample of special items. For those in between, there is no clear calculation (e.g., ETR) for the rate as far as we can tell. We cannot ascertain how this choice is made and the Compustat manuals provide no clarification.
We assume a statutory tax rate of 35 percent in this example because our sample period predates the establishment of a 21 percent flat corporate tax rate under the Tax Cuts and Jobs Act. However, substituting a 21 percent tax rate in our example leads to the same conclusion that the ETR is a flawed estimate of the true tax rate. Tax expense at 21 percent would equal 30 * TOP = $6.30, resulting in after-tax earnings before NSIs of 40 − $6.30 = $33.70.
Goodwill deductibility is a complex situation depending on the structure of the acquisition. Generally, stock-for-stock (cash for asset) acquisitions result in nondeductible (deductible and amortized over 15 years) goodwill, though there are exceptions and also mixed consideration transactions (e.g., Henning and Shaw 2000; Ayers et al. 2000; 2004; Martin 1996; Erickson 1998; Oler 2008). Khalil et al. (2021, Appendix B) explain the timing issues for taxable acquisitions, and their study examines a strategy for deducting impairments of goodwill.
We perform the same analyses for a smaller sample of 25 positive special items observations (reported in Appendix 2, Panel B) and find that the mean (median) valuation allowance is 42.8 (18.0) percent of the deferred tax asset. We also find that 28 percent have a valuation allowance greater than 95 percent and 8 percent have no allowance. Of these firms, 23 of 25 report positive pre-tax income.
Our review of the Compustat manuals as well as company disclosures suggests that, with the exception of nondeductible goodwill impairments, every component of special items is currently taxable or a temporary timing difference. That said, there may be limited circumstances where a portion of an item gives rise to a permanent book-tax difference. We note the following examples: 1) debt repurchases that are governed by restrictions under IRC §249, 2) gains from debt forgiveness where the firm is allowed to exclude the cancellation of debt income due to bankruptcy or insolvency, 3) fines and penalties on settlements, 4) interest or fines on tax settlements, 5) nontaxable insurance settlements. We believe instances of these items occurring in the data are limited.
The marginal tax rates provided by Professor Graham account for many important features of the tax code, including uncertainty about taxable income, deferred taxes, the progressivity of the statutory tax schedule, net operating loss carryforwards and carrybacks, certain tax credits, and the alternative minimum tax. The data are available at his website: http://faculty.fuqua.duke.edu/~jgraham/taxform.html. We thank him for making this data available.
We do so to calculate the implied Compustat tax rate on total special items. Compustat provides after-tax values for the individual special item components (e.g., restructuring charges) but not for total special items.
Compustat reports each of the components of special items (e.g., restructuring charges, goodwill impairments, etc.) on both a pre- and after-tax basis, but total special items (SPIQ) are only reported on a pre-tax basis. Thus this method is effectively the weighted-average tax rate assumed by Compustat on total special items.
Cready et al. (2012, Table 3, p. 1179) report income transfer for the pre-tax model of 7.8 percent.
Evaluating positive special items is particularly difficult because, as Appendix 1 makes clear, many PSIs are merely the reversal of a prior NSI that must have been overestimated when originally reported.
This assumes an examination of aggregate goodwill impairments (i.e., both deductible and nondeductible) as in the current study.
We do not replicate all 71 studies but include examples of the main genres of research to note the possible empirical implications of assumed tax rates in various contexts. Sample selection and descriptive statistics for the following tests are not tabulated but were compared with the studies in each area to confirm proper replication was achieved. Sample selection and descriptive results are available from the authors upon request.
NSIs are entered as positive values in the model.
Interestingly, in untabulated sensitivity analyses, these findings are unrelated to pre-tax income versus losses as the results hold nearly identically in subsamples split on this dimension. We thank an anonymous reviewer for suggesting this sensitivity test.
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Acknowledgements
We greatly appreciate the many helpful comments we have received through multiple versions of this manuscript. In particular, we thank Brooke Beyer, Robert Gary, Molly Mathis, Jared Moore, and Steve Rock. We also thank workshop participants at the 2017 Colorado Accounting Research Symposium, the 2019 Oklahoma State University School of Accounting Ph.D. Alumni Research Conference, and the 2019 American Accounting Association Annual Meeting, especially discussant Anup Srivastava. We are especially appreciative of Editor Jennifer Blouin and an anonymous referee for valuable feedback in helping to shape the final product. Finally, we would like to express special thanks to John Graham for providing us access to his MTR data.
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Appendices
Appendix 1. Compustat Special Items
The Compustat User’s Guide states that “special items” represent “unusual or nonrecurring items presented above taxes by the company.” Special items (when reported above taxes) includes:
-
1.
Adjustments applicable to prior years (except recurring prior year income tax adjustments)
-
2.
After-tax adjustments to net income for the purchase portion of net income of partly pooled companies when the adjustment is carried over to retained earnings
-
3.
Any significant nonrecurring items
-
4.
The current year’s results of discontinued operations and operations to be discontinued
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5.
Flood, fire, and other natural disaster losses
-
6.
Impairment of goodwill/unamortized intangibles
-
7.
Interest on tax settlements (when reported separately from other interest expense)
-
8.
Inventory write-downs when reported separately or called “nonrecurring”
-
9.
Nonrecurring profit or loss on the sale of assets, investments, securities, among others
-
10.
Profit or loss on the repurchase of debentures
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11.
Purchased research and development
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12.
Relocation and moving expense
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13.
Reserve for litigation
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14.
Restructuring charges (includes closing and exit costs)
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15.
Severance pay when reported separately on the income statement
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16.
Special allowances for facilities under construction
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17.
Transfers from reserves provided for in prior years
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18.
Write-down of assets
-
19.
Write-downs or write-offs of receivables, intangibles, among others
-
20.
Write-offs of capitalized computer software costs
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21.
Year 2000 expenses
The Compustat Data Guide notes the following items are specifically excluded from special items:
-
1.
Any special item listed above as “include” that appears every year for the last three years, unless it has specifically been called restructuring, special, or nonrecurring. (Additionally, this does not apply to Year 2000 expenses, impairment of goodwill, extinguishment of debt, settlements, in-process R&D, or purchased R&D.)
-
2.
Foreign exchange (currency) adjustments (included in Nonoperating Income [Expense])
-
3.
Gain/loss on sale of marketable securities for companies that have adopted SFAS #115
-
4.
Idle plant expense (included in Nonoperating Income [Expense])
-
5.
Interest on tax settlements, when included by the company with other interest expense (included in interest expense)
-
6.
Milestone payments or one-time contract reimbursements for R&D companies
-
7.
Nonrecurring items that are included in equity in earnings
-
8.
Profit or loss on sale of properties (except for securities, etc.) for the companies in the oil, coal, transportation, and other industries where these transactions are considered a normal part of doing business (included in Nonoperating Income [Expense])
-
9.
Shipping firms’ operating differential subsidies and estimated profit adjustments for preceding years. Prior years’ operating differential subsidies are included in Nonoperating Income (Expense). Current year operating differential subsidy is included in sales. Adjustments by shipping companies to estimated profits reported by this method are ignored.
Beginning in 2001, the following special items breakout categories are provided by Compustat, with options for: pretax, after-tax, basic EPS, and diluted EPS effect (though data may be missing for many of these items).
Data Field | Included Items per Compustat | Interpretation of Negative Special Items | Interpretation of Positive Special Items |
|---|---|---|---|
Acquisitions & mergers (AQ) | Costs of failed acquisitions | Deductible in year deemed paid | Indicates reversal of a prior-period GAAP adjustment |
Extinguishment of debt (DTE) | Gain on repurchase or retirement of debt | N/A | Cancellation of debt income is generally taxable, but exceptions are made for bankrupt or insolvent companies |
Loss from prepayment of debt | Deductible in year deemed paid | N/A | |
Adjustments related to SFAS 145 | GAAP adjustment | GAAP adjustment | |
Impairment of goodwill (GDWLI) | Write-off of goodwill, impairment of unamortized intangibles | GAAP impairment charge is a permanent difference, but Sec. 197 intangibles (e.g., Goodwill) amortized over 15 years for tax purposes; unrecovered basis recognized as loss for tax purposes upon abandonment or disposal | Indicates reversal of a prior-period GAAP adjustment |
Gain/loss (GL) | Gain/loss items, including amounts from restructuring, not related to impairments or dilution | Loss recognized for tax purposes upon disposal | Gain recognized for tax purposes upon disposal |
Restructuring costs (RC) | Severance, closing costs, exit costs, reductions in workforce, rationalizations, realignment, relocation charges, repositioning, early retirement, Chapter 11 reorganization costs, Chapter 11 expenses | Generally deductible, either as incurred or subject to capitalization and amortization | Indicates reversal of a prior-period GAAP adjustment |
In-process research & development (RDIP) | Portion of R&D considered to be “purchased” and written off immediately upon acquisition if the R&D items are deemed not to have an alternative use | Generally deductible when the project is finally abandoned and deemed worthless | Indicates reversal of a prior-period GAAP adjustment |
Litigation & insurance settlements (SET) | Provisions to adjust reserves for litigation and settlements, Insurance recovery proceeds | Deductible in year deemed paid | Indicates reversal of a previous GAAP adjustment or receipt of insurance proceeds (generally tax-exempt) offsetting prior-period loss |
Write-downs (WD) | Impairment or write-down of assets other than goodwill and unamortized intangibles | GAAP impairment charge is a permanent difference, but Sec. 167 intangibles (e.g., noncompete agreements) amortized over useful life; unrecovered basis recognized as loss for tax purposes upon abandonment or disposal | Indicates reversal of a prior-period GAAP adjustment |
Other special items (SPIO) | Gain/loss attributable to pension, post retirement curtailment, settlement, termination | Deductible in year deemed paid | Gain recognized for tax purposes upon disposal, GAAP adjustment not taxable |
Dilution gains/losses | GAAP adjustment | GAAP adjustment |
Appendix 2
Panel A : Detailed examination of random sample of 100 firms where |NSI|÷ Assets > 1.0%
# | Company Name | FYear | Qtr | NSI | Assets | NSI% | PTI | DTA | VA | %VA | ETR | MTR |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
1 | Restoration Hardware Holdings, Inc | 2016 | 4 | − 23.773 | 2,192.520 | − 1.08% | 15.156 | 28.466 | 0.76 | 2.67% | 37.7% | 4.3% |
2 | Krispy Kreme Doughnuts, Inc | 2007 | 2 | − 10.600 | 255.936 | − 4.14% | − 26.831 | 176.964 | 176.964 | 100.00% | 0.0% | 1.3% |
3 | Silgan Holdings, Inc | 2003 | 4 | − 19.513 | 1,621.084 | − 1.20% | − 4.029 | 142.342 | 18.713 | 13.15% | 39.6% | 7.6% |
4 | Juniper Networks, Inc | 2009 | 4 | − 184.543 | 7,590.263 | − 2.43% | 3.948 | 531.2 | 112.8 | 21.23% | 0.0% | 2.2% |
5 | Sourcecorp, Inc | 2004 | 3 | − 10.165 | 457.902 | − 2.22% | − 2.198 | 11.589 | 0 | 0.00% | 81.7% | 4.2% |
6 | Weyerhaeuser Company | 2017 | 3 | − 209.000 | 18,402.000 | − 1.14% | 103.000 | 620 | 63 | 10.16% | 0.0% | 2.6% |
7 | NewMarket Corporation | 2006 | 4 | − 7.477 | 744.793 | − 1.00% | 3.711 | 59.189 | 0 | 0.00% | 9.9% | 30.5% |
8 | Zale Corporation | 2003 | 2 | − 136.300 | 1,449.503 | − 9.40% | 6.683 | 44.627 | 0 | 0.00% | 100.0% | 4.4% |
9 | Zimmer Biomet Holdings, Inc | 2015 | 3 | − 316.600 | 26,689.100 | − 1.19% | 31.800 | 895.6 | 72.7 | 8.12% | 30.2% | 35.0% |
10 | MTS Systems Corporation | 2010 | 3 | − 6.148 | 359.188 | − 1.71% | − 1.563 | 21.167 | 0.986 | 4.66% | 100.0% | 3.0% |
11 | Tuesday Morning Corporation | 2003 | 4 | − 3.854 | 253.394 | − 1.52% | 56.667 | 7040 | 0 | 0.00% | 38.4% | 35.0% |
12 | InterMune, Inc | 2006 | 2 | − 30.000 | 224.967 | − 13.34% | − 44.018 | 252 | 252 | 100.00% | 0.0% | 0.7% |
13 | Abercrombie & Fitch Co | 2013 | 3 | − 46.298 | 2,852.396 | − 1.62% | − 37.025 | 176.076 | 0.202 | 0.11% | 57.7% | 35.4% |
14 | Electronic Arts, Inc | 2007 | 4 | − 156.000 | 6,059.000 | − 2.57% | − 136.000 | 424 | 22 | 5.19% | 31.6% | 4.6% |
15 | Model N, Inc | 2017 | 2 | − 3.563 | 175.622 | − 2.03% | − 16.600 | 92.493 | 78.003 | 84.33% | 24.8% | 1.7% |
16 | J. C. Penney Company, Inc | 2011 | 3 | − 265.000 | 12,751.000 | − 2.08% | − 226.000 | 708 | 0 | 0.00% | 36.7% | 32.6% |
17 | The Scotts Miracle-Gro Company | 2011 | 4 | − 31.200 | 2,052.200 | − 1.52% | − 110.200 | 208.2 | 44.3 | 21.28% | 34.9% | 1.0% |
18 | LCA-Vision, Inc | 2012 | 4 | − 1.700 | 48.968 | − 3.47% | − 5.832 | 26,377 | 26,377 | 100.00% | 3.6% | 1.6% |
19 | Ablest, Inc | 2005 | 3 | − 0.290 | 26.532 | − 1.09% | 0.590 | 2110 | 0 | 0.00% | 37.8% | 0.3% |
20 | DGSE Companies, Inc | 2012 | 3 | − 1.407 | 24.489 | − 5.75% | − 0.403 | 8.73 | 8.73 | 100.00% | 0.0% | 2.9% |
21 | TTM Technologies, Inc | 2016 | 4 | − 48.908 | 2,500.076 | − 1.96% | 15.606 | 298.849 | 221.951 | 74.27% | 100.0% | 4.1% |
22 | Omnicare, Inc | 2013 | 3 | − 209.900 | 6,915.526 | − 3.04% | − 95.701 | 288.611 | 24.159 | 8.37% | 27.5% | 2.6% |
23 | PLX Technology, Inc | 2013 | 2 | − 0.903 | 73.422 | − 1.23% | 1.734 | 67.173 | 67.173 | 100.00% | 3.5% | 3.2% |
24 | LSI Industries, Inc | 2009 | 2 | − 13.450 | 157.626 | − 8.53% | − 14.006 | 10.222 | 1.94 | 18.98% | 4.5% | 2.8% |
25 | Fossil Group, Inc | 2017 | 1 | − 26.284 | 2,101.718 | − 1.25% | − 48.009 | 127.25 | 78.314 | 61.54% | 0.0% | 4.4% |
26 | Castlight Health, Inc | 2017 | 1 | − 3.409 | 147.401 | − 2.31% | − 14.374 | 112.968 | 112.968 | 100.00% | 0.0% | 2.5% |
27 | Regis Corporation | 2005 | 3 | − 38.319 | 1,701.128 | − 2.25% | − 5.214 | 17.229 | 0 | 0.00% | 0.0% | 35.0% |
28 | Dycom Industries, Inc | 2008 | 4 | − 9.295 | 789.036 | − 1.18% | 6.253 | 37.395 | 0.33 | 0.88% | 26.6% | 4.8% |
29 | Intelligent Systems Corporation | 2008 | 4 | − 0.369 | 8.706 | − 4.24% | 0.179 | 11.606 | 11.606 | 100.00% | 0.0% | 1.2% |
30 | PolyOne Corporation | 2014 | 2 | − 39.300 | 2,846.700 | − 1.38% | 33.300 | 205.4 | 23.6 | 11.49% | 7.8% | 4.0% |
31 | LifeVantage Corporation | 2017 | 1 | − 1.011 | 49.796 | − 2.03% | 1.678 | 5.24 | 0.312 | 5.95% | 29.7% | 2.8% |
32 | O’Charley’s Inc | 2008 | 3 | − 47.987 | 588.494 | − 8.15% | − 53.008 | 67.806 | 65.791 | 97.03% | 0.0% | 0.6% |
33 | Kirkland’s, Inc | 2003 | 4 | − 1.053 | 103.129 | − 1.02% | 23.587 | 3.326 | 0 | 0.00% | 39.1% | 35.0% |
34 | Mines Management, Inc | 2007 | 4 | − 1.000 | 42.157 | − 2.37% | − 3.184 | 3.77 | 3.77 | 100.00% | 0.0% | 0.1% |
35 | Pinnacle Data Systems, Inc | 2006 | 2 | − 0.633 | 26.241 | − 2.41% | 0.086 | 1.507 | 0 | 0.00% | 39.5% | 34.0% |
36 | International Flavors & Fragrances Inc | 2011 | 4 | − 43.299 | 2,965.581 | − 1.46% | 40.530 | 478.322 | 290.879 | 60.81% | 39.8% | 1.0% |
37 | EnPro Industries, Inc | 2009 | 2 | − 113.900 | 1,169.200 | − 9.74% | − 102.400 | 286.4 | 0 | 0.00% | 0.0% | 35.1% |
38 | Antares Pharma, Inc | 2006 | 4 | − 0.139 | 11.534 | − 1.21% | − 1.414 | 22.588 | 22.588 | 100.00% | 0.0% | 0.1% |
39 | Revlon, Inc | 2012 | 3 | − 26.300 | 1,183.600 | − 2.22% | − 3.500 | 373.2 | 70.6 | 18.92% | 0.0% | 2.1% |
40 | Lowe’s Companies, Inc | 2016 | 3 | − 432.000 | 35,370.000 | − 1.22% | 776.000 | 1229 | 578 | 47.03% | 51.2% | 1.0% |
41 | Elizabeth Arden, Inc | 2008 | 4 | − 27.926 | 970.734 | − 2.88% | − 19.440 | 42.02 | 0.823 | 1.96% | 46.3% | 1.6% |
42 | OSI Pharmaceuticals, Inc | 2004 | 4 | − 64.799 | 388.029 | − 16.70% | − 123.189 | 415.355 | 415.355 | 100.00% | 0.0% | 0.0% |
43 | inTEST Corporation | 2017 | 4 | − 7.580 | 62.493 | − 12.13% | − 4.511 | 1.185 | 0.37 | 31.22% | 0.0% | 37.7% |
44 | Belden, Inc | 2012 | 3 | − 77.318 | 2,175.599 | − 3.55% | − 77.573 | 151.572 | 7.498 | 4.95% | 28.2% | 2.4% |
45 | Maytag Corporation | 2003 | 4 | − 31.273 | 3,024.140 | − 1.03% | 30.320 | 421.774 | 38.171 | 9.05% | 37.5% | 30.3% |
46 | Align Technology, Inc | 2009 | 3 | − 71.579 | 330.784 | − 21.64% | − 60.465 | 76.724 | 6.182 | 8.06% | 17.4% | 1.8% |
47 | Gibraltar Industries, Inc | 2014 | 4 | − 108.302 | 814.160 | − 13.30% | − 107.332 | 28.814 | 0.4 | 1.39% | 10.8% | 33.3% |
48 | Myrexis, Inc | 2012 | 4 | − 1.834 | 91.651 | − 2.00% | − 4.420 | 47.917 | 47.917 | 100.00% | 0.0% | 1.6% |
49 | Callaway Golf Company | 2011 | 3 | − 12.624 | 765.750 | − 1.65% | − 47.733 | 119.197 | 110.844 | 92.99% | 0.0% | 1.0% |
50 | Meritor, Inc | 2012 | 4 | − 27.000 | 2,501.000 | − 1.08% | 12.000 | 1324 | 1204 | 90.94% | 58.3% | 24.6% |
51 | Herman Miller, Inc | 2009 | 4 | − 9.600 | 770.600 | − 1.25% | − 0.200 | 94.9 | 11 | 11.59% | 100.0% | 26.0% |
52 | lululemon athletica, inc | 2017 | 3 | − 22.185 | 1,720.449 | − 1.29% | 86.640 | 64.395 | 1.843 | 2.86% | 32.0% | 1.0% |
53 | USG Corporation | 2014 | 3 | − 78.000 | 4,064.000 | − 1.92% | − 9.000 | 1023 | 1023 | 100.00% | 0.0% | 1.6% |
54 | Cascade Corporation | 2009 | 4 | − 13.376 | 341.931 | − 3.91% | − 13.454 | 51.186 | 22.011 | 43.00% | 0.0% | 1.4% |
55 | Volcano Corporation | 2008 | 2 | − 12.232 | 254.340 | − 4.81% | − 13.230 | 37.27 | 37.27 | 100.00% | 0.0% | 1.3% |
56 | Valmont Industries, Inc | 2014 | 3 | − 31.905 | 2,862.721 | − 1.11% | 39.511 | 248.909 | 104.487 | 41.98% | 36.0% | 35.2% |
57 | Wolverine World Wide, Inc | 2016 | 4 | − 50.300 | 2,431.700 | − 2.07% | − 7.900 | 128.5 | 11.5 | 8.95% | 75.9% | 1.0% |
58 | Carrizo Oil & Gas, Inc | 2005 | 3 | − 3.721 | 365.700 | − 1.02% | − 11.052 | 2.793 | 0.274 | 9.81% | 28.4% | 5.1% |
59 | NutriSystem, Inc | 2008 | 4 | − 6.483 | 159.471 | − 4.07% | 0.981 | 9.689 | 3.749 | 38.69% | 100.0% | 35.1% |
60 | Adept Technology, Inc | 2009 | 3 | − 0.392 | 30.965 | − 1.27% | − 3.555 | 39.721 | 39.721 | 100.00% | 1.4% | 0.7% |
61 | Advanced Micro Devices, Inc | 2014 | 4 | − 301.000 | 3,767.000 | − 7.99% | − 367.000 | 3570 | 3495 | 97.90% | 0.8% | 2.1% |
62 | Numerex Corp | 2010 | 4 | − 2.412 | 57.146 | − 4.22% | − 1.610 | 11.97 | 11.97 | 100.00% | 13.5% | 3.0% |
63 | Alaska Communications Systems Group, Inc | 2011 | 2 | − 12.045 | 615.631 | − 1.96% | − 6.823 | 109.468 | 5.5 | 5.02% | 46.4% | 1.5% |
64 | Quidel Corporation | 2003 | 3 | − 1.376 | 86.866 | − 1.58% | − 0.789 | 17.1 | 1.9 | 11.11% | 39.0% | 2.8% |
65 | Ribbon Communications, Inc | 2017 | 2 | − 5.180 | 292.353 | − 1.77% | − 11.874 | 115.51 | 89.6 | 77.57% | 0.0% | 2.2% |
66 | AGCO Corporation | 2006 | 4 | − 171.400 | 4,114.500 | − 4.17% | − 103.200 | 472.5 | 291.4 | 61.67% | 0.0% | 3.7% |
67 | Spectrum Brands Holdings, Inc | 2015 | 3 | − 98.200 | 7,472.200 | − 1.31% | 21.100 | 587.9 | 268.7 | 45.71% | 0.0% | 2.8% |
68 | AdStar, Inc., | 2004 | 4 | − 1.423 | 7.412 | − 19.20% | − 2.206 | 5.72 | 5.72 | 100.00% | 0.4% | 1.1% |
69 | Symbol Technologies, Inc | 2003 | 2 | − 16.295 | 1,526.611 | − 1.07% | 8.770 | 532.069 | 43.936 | 8.26% | 24.6% | 5.6% |
70 | Convergys Corporation | 2012 | 2 | − 94.600 | 2,111.600 | − 4.48% | − 64.200 | 147.2 | 19.7 | 13.38% | 16.4% | 4.4% |
71 | Salix Pharmaceuticals, Ltd | 2011 | 4 | − 27.000 | 1,312.969 | − 2.06% | 16.626 | 126.17 | 7.711 | 6.11% | 0.0% | 1.0% |
72 | SeaChange International, Inc | 2015 | 4 | − 20.024 | 177.669 | − 11.27% | − 22.306 | 47.877 | 47.368 | 98.94% | 0.1% | 1.4% |
73 | AK Steel Holding Corporation | 2005 | 4 | − 78.500 | 5,487.900 | − 1.43% | − 67.600 | 1666.8 | 35.2 | 2.11% | 40.8% | 26.6% |
74 | CRA International, Inc | 2015 | 4 | − 4.453 | 313.717 | − 1.42% | − 2.553 | 33,866 | 4003 | 11.82% | 0.0% | 2.6% |
75 | Abeona Therapeutics, Inc | 2016 | 4 | − 1.200 | 111.058 | − 1.08% | − 7.002 | 88.021 | 88.021 | 100.00% | 0.0% | 1.8% |
76 | AbbVie, Inc | 2014 | 3 | − 737.000 | 28,454.000 | − 2.59% | 687.000 | 2152 | 172 | 7.99% | 26.3% | 0.9% |
77 | The E. W. Scripps Company | 2015 | 2 | − 31.053 | 1,698.720 | − 1.83% | − 19.494 | 134.204 | 2.334 | 1.74% | 33.5% | 1.9% |
78 | The Spectranetics Corporation | 2009 | 2 | − 1.152 | 105.611 | − 1.09% | − 2.342 | 19.22 | 12.735 | 66.26% | 1.7% | 1.6% |
79 | Energy Focus, Inc | 2016 | 4 | − 0.857 | 34.978 | − 2.45% | − 7.800 | 12.537 | 12.537 | 100.00% | 0.0% | 1.0% |
80 | Starwood Hotels & Resorts Worldwide, Inc | 2009 | 4 | − 376.000 | 8,761.000 | − 4.29% | − 332.000 | 1350 | 482 | 35.70% | 44.0% | 3.3% |
81 | Visteon Corporation | 2016 | 4 | − 35.000 | 2,373.000 | − 1.47% | 34.000 | 1860 | 1532 | 82.37% | 8.8% | 2.5% |
82 | H.B. Fuller Company | 2014 | 4 | − 26.637 | 1,869.006 | − 1.43% | 21.726 | 104,360 | 16,364 | 15.68% | 50.3% | 2.3% |
83 | Lantronix, Inc | 2016 | 2 | − 0.286 | 27.091 | − 1.06% | − 0.922 | 35.85 | 35.85 | 100.00% | 0.0% | 3.3% |
84 | Chemed Corporation | 2007 | 2 | − 13.715 | 779.532 | − 1.76% | 15.398 | 52.814 | 0 | 0.00% | 38.7% | 1.7% |
85 | Sykes Enterprises, Inc | 2010 | 3 | − 9.634 | 816.447 | − 1.18% | 16.567 | 114.128 | 60.091 | 52.65% | 0.0% | 1.6% |
86 | Giga-tronics, Inc | 2012 | 3 | − 0.099 | 9.309 | − 1.06% | − 0.865 | 16.403 | 16.403 | 100.00% | 0.0% | 1.4% |
87 | MSA Safety, Inc | 2017 | 2 | − 32.219 | 1,362.036 | − 2.37% | 11.712 | 60.709 | 4.559 | 7.51% | 0.0% | 0.9% |
88 | Eli Lilly and Company | 2004 | 4 | − 524.000 | 24,867.000 | − 2.11% | 520.000 | 2714.4 | 508.4 | 18.73% | 100.0% | 35.2% |
89 | LoJack Corporation | 2009 | 3 | − 18.250 | 149.673 | − 12.19% | − 19.681 | 25.828 | 8.137 | 31.50% | 31.7% | 1.7% |
90 | Lumber Liquidators Holdings, Inc | 2017 | 1 | − 18.000 | 478.996 | − 3.76% | − 25.927 | 36.198 | 26.318 | 72.71% | 0.0% | 2.7% |
91 | Lawson Products, Inc | 2013 | 4 | − 2.401 | 159.945 | − 1.50% | − 3.312 | 36.536 | 35.834 | 98.08% | 0.0% | 1.9% |
92 | Quixote Corporation | 2006 | 4 | − 15.618 | 125.203 | − 12.47% | − 13.985 | 24.16 | 0.445 | 1.84% | 34.8% | 38.1% |
93 | Maxtor Corporation | 2004 | 3 | − 31.393 | 2,327.219 | − 1.35% | − 96.446 | 479.873 | 181.295 | 37.78% | 1.3% | 3.1% |
94 | Rayonier Advanced Materials Inc | 2015 | 2 | − 26.660 | 1,260.984 | − 2.11% | − 0.665 | 159.915 | 19.702 | 12.32% | 52.9% | 35.6% |
95 | Kendle International, Inc | 2006 | 4 | − 9.277 | 455.072 | − 2.04% | − 6.961 | 27.689 | 7.67 | 27.70% | 33.1% | 1.6% |
96 | Telkonet, Inc | 2007 | 4 | − 2.472 | 38.741 | − 6.38% | − 7.254 | 32.292 | 32.292 | 100.00% | 0.0% | 0.2% |
97 | Mattel, Inc | 2017 | 3 | − 74.242 | 6,199.684 | − 1.20% | 61.263 | 767.418 | 579.245 | 75.48% | 100.0% | 1.2% |
98 | Cytec Industries, Inc | 2005 | 2 | − 62.700 | 4,099.200 | − 1.53% | − 3.600 | 338.2 | 23.2 | 6.86% | 100.0% | 33.3% |
99 | Limited Brands, Inc | 2012 | 4 | − 120.082 | 6,019.000 | − 2.00% | 710.410 | 370 | 171 | 46.22% | 42.1% | 35.1% |
100 | United Continental Holdings, Inc | 2016 | 2 | − 425.000 | 40,476.000 | − 1.05% | 931.000 | 6010 | 68 | 1.13% | 36.8% | 1.0% |
Mean | − 66.082 | 3,275.102 | − 3.56% | 16.926 | 2,104.591 | 606.593 | 42.13% | 25.3% | 9.1% | |||
Median | − 21.105 | 784.284 | − 2.00% | − 3.248 | 114.819 | 23.400 | 21.26% | 16.9% | 2.5% | |||
Mean where VA% < 100% (79 obs) | 26.75% | |||||||||||
Mean where VA% < 95% (75 obs) | 22.95% | |||||||||||
1 st Qtr Obs | 4 | |||||||||||
2 nd Qtr Obs | 22 | |||||||||||
3 rd Qtr Obs | 29 | |||||||||||
4 th Qtr Obs | 45 |
FYear Fiscal year from Compustat, Qtr Fiscal quarter from Compustat, NSI Total negative special items (SPIQ < 0) from Compustat, Assets Total assets (ATQ) from Compustat, NSI% NSI / assets, PTI Pre-tax income (PIQ) from Compustat, DTATotal deferred tax assets from the income taxes footnote in the 10-K (subsequent 10-K if interim quarter observation), VA The valuation allowance on the deferred tax assets from the income taxes footnote in the 10-K (subsequent 10-K if interim quarter observation), %VA VA / DTA, ETR total income tax expense (TXTQ) divided by pre-tax income (PIQ), MTR Firm-specific marginal tax rate provided by Graham (1996a, 1996b)
2.1 Panel B: Detailed examination of random sample of 25 firms where PSI ÷ Assets > 1.0%
# | Company Name | FYear | Qtr | PSI | Assets | PSI% | PTI | DTA | VA | %VA | ETR | MTR |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
1 | Imperva, Inc | 2017 | 1 | 34.279 | 446.726 | 7.67% | 24.041 | 48.424 | 46.125 | 95.25% | 4.0% | 4.0% |
2 | Alico, Inc | 2009 | 2 | 7.000 | 218.105 | 3.21% | 4.034 | 9.926 | 0.651 | 6.56% | 49.0% | 2.5% |
3 | SMTC Corporation | 2004 | 3 | 2.490 | 94.823 | 2.63% | 2.983 | 68.410 | 68.410 | 100.00% | 3.3% | 1.1% |
4 | EnPro Industries, Inc | 2010 | 2 | 45.000 | 1082.100 | 4.16% | 70.200 | 96.500 | 6.900 | 7.15% | 36.6% | 1.5% |
5 | SigmaTel, Inc | 2006 | 3 | 45.673 | 284.279 | 16.07% | 29.017 | 9.436 | 1.270 | 13.46% | 60.3% | 0.8% |
6 | Maxygen, Inc | 2010 | 4 | 20.000 | 146.986 | 13.61% | 70.435 | 51.284 | 51.284 | 100.00% | 1.3% | 0.9% |
7 | Tiffany & Co | 2007 | 3 | 95.051 | 3133.098 | 3.03% | 151.479 | 272.825 | 21.035 | 7.71% | 33.9% | 0.9% |
8 | Landauer, Inc | 2016 | 3 | 4.131 | 194.670 | 2.12% | 10.804 | 30.745 | 0.456 | 1.48% | 31.3% | 4.4% |
9 | Harris Corporation | 2007 | 3 | 118.100 | 3940.800 | 3.00% | 272.100 | 200.400 | 167.900 | 83.78% | 23.4% | 1.2% |
10 | Best Buy Co., Inc | 2013 | 2 | 225.000 | 13,284.000 | 1.69% | 406.000 | 879.000 | 158.000 | 17.97% | 41.2% | 3.4% |
11 | Sento Corporation | 2005 | 2 | 0.182 | 15.415 | 1.18% | 0.316 | 4.630 | 4.619 | 99.76% | 2.2% | 14.5% |
12 | Louisiana-Pacific Corporation | 2013 | 2 | 35.900 | 2571.900 | 1.40% | 114.500 | 205.000 | 23.500 | 11.46% | 20.5% | 27.2% |
13 | Pixelworks, Inc | 2008 | 3 | 7.992 | 92.887 | 8.60% | 8.533 | 98.260 | 96.767 | 98.48% | 3.7% | 1.9% |
14 | AMREP Corporation | 2017 | 1 | 1.318 | 105.808 | 1.25% | 2.214 | 12.483 | 3.873 | 31.03% | 34.6% | 2.0% |
15 | Ballantyne Strong, Inc | 2017 | 4 | 0.946 | 59.014 | 1.60% | − 0.324 | 12.924 | 12.317 | 95.30% | 0.0% | 0.9% |
16 | Con-way, Inc | 2006 | 4 | 41.041 | 2301.889 | 1.78% | 106.313 | 246.953 | 21.164 | 8.57% | 21.4% | 3.7% |
17 | Temple-Inland, Inc | 2009 | 2 | 66.000 | 5802.000 | 1.14% | 101.000 | 585.000 | 23.000 | 3.93% | 34.7% | 2.8% |
18 | TransAct Technologies Incorporated | 2013 | 4 | 0.640 | 40.408 | 1.58% | 1.405 | 3.038 | 0.242 | 7.97% | 21.1% | 33.2% |
19 | Sypris Solutions, Inc | 2007 | 3 | 4.835 | 435.037 | 1.11% | 3.236 | 25.886 | 0.000 | 0.00% | 18.5% | 6.1% |
20 | Allegheny Energy, Inc | 2004 | 4 | 93.126 | 9045.140 | 1.03% | 140.917 | 661.700 | 4.300 | 0.65% | 38.7% | 8.8% |
21 | I-trax, Inc | 2003 | 3 | 0.500 | 13.887 | 3.60% | − 1.610 | 10.442 | 9.548 | 91.44% | 0.0% | 0.9% |
22 | Mercer International, Inc | 2014 | 3 | 31.851 | 1547.916 | 2.06% | 62.620 | 187.087 | 87.862 | 46.96% | 0.0% | 2.8% |
23 | IntriCon Corporation | 2012 | 3 | 0.822 | 40.915 | 2.01% | 0.281 | 8.753 | 8.746 | 99.92% | 13.1% | 16.0% |
24 | Globecomm Systems, Inc | 2012 | 4 | 4.129 | 310.067 | 1.33% | 9.126 | 11.214 | 2.850 | 25.41% | 22.4% | 3.1% |
25 | Tetra Tech, Inc | 2014 | 4 | 23.816 | 1776.404 | 1.34% | 22.646 | 50.879 | 7.576 | 14.89% | 0.3% | 6.6% |
Mean | 36.393 | 1,879.371 | 3.5% | 64.491 | 151.648 | 33.136 | 42.8% | 20.6% | 6.1% | |||
Median | 20.000 | 310.067 | 2.0% | 22.646 | 50.879 | 9.548 | 18.0% | 21.1% | 2.8% | |||
Mean where VA% < 95% (18 obs) | 22.14% | |||||||||||
1 st Qtr Obs | 2 | |||||||||||
2 nd Qtr Obs | 6 | |||||||||||
3 rd Qtr Obs | 10 | |||||||||||
4 th Qtr Obs | 7 |
PSI Total positive special items (SPIQ > 0) from Compustat, PSI% PSI / Assets
2.2 Panel C : Detailed examination of random sample of 25 firms where |RC|÷ Assets > 1.0%
# | Company Name | FYear | Qtr | RC | Assets | RC% | PTI | DTA | VA | %VA | ETR | MTR |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
1 | Lionbridge Technologies, Inc | 2010 | 4 | -1.881 | 156.976 | -1.2% | -2.468 | 109.480 | 107.957 | 98.61% | 0.0% | 35.2% |
2 | ParkerVision, Inc | 2015 | 2 | -0.313 | 13.334 | -2.3% | -4.842 | 122.152 | 122.152 | 100.00% | 0.0% | 0.5% |
3 | Vermillion, Inc | 2017 | 4 | -0.286 | 7.497 | -3.8% | -2.955 | 23.320 | 23.320 | 100.00% | 0.0% | 3.1% |
4 | NPS Pharmaceuticals, Inc | 2006 | 2 | -6.012 | 248.092 | -2.4% | -39.275 | 385.473 | 385.473 | 100.00% | 0.0% | 1.9% |
5 | Perry Ellis International, Inc | 2016 | 2 | -5.897 | 559.345 | -1.1% | -4.428 | 51.744 | 48.052 | 92.86% | 19.5% | 2.1% |
6 | Libbey Inc | 2005 | 2 | -6.411 | 625.850 | -1.0% | -1.293 | 52.459 | 3.033 | 5.78% | 32.6% | 7.6% |
7 | Tollgrade Communications, Inc | 2006 | 3 | -5.808 | 161.142 | -3.6% | -5.009 | 6.267 | 2.733 | 43.61% | 35.1% | 27.2% |
8 | Phoenix Technologies Ltd | 2007 | 4 | -1.036 | 94.480 | -1.1% | -0.668 | 43.779 | 43.549 | 99.47% | 100.0% | 1.0% |
9 | PowerSecure International, Inc | 2007 | 2 | -14.139 | 81.516 | -17.3% | -14.217 | 13.630 | 8.290 | 60.82% | 0.0% | 1.2% |
10 | MicroStrategy Incorporated | 2014 | 3 | -11.578 | 559.733 | -2.1% | -2.013 | 37.852 | 0.077 | 0.20% | 58.0% | 3.2% |
11 | Fair Isaac Corporation | 2015 | 4 | -15.986 | 1230.163 | -1.3% | 20.467 | 70.276 | 13.882 | 19.75% | 3.2% | 1.7% |
12 | SIFCO Industries, Inc | 2017 | 3 | -4.430 | 116.442 | -3.8% | -5.634 | 17.215 | 9.597 | 55.75% | 0.0% | 1.3% |
13 | Lexmark International, Inc | 2009 | 4 | -45.900 | 3354.200 | -1.4% | 82.200 | 213.800 | 0.200 | 0.09% | 27.4% | 4.9% |
14 | Endwave Corporation | 2009 | 4 | -1.196 | 77.116 | -1.6% | -3.515 | 74.554 | 74.554 | 100.00% | 2.1% | 2.5% |
15 | Network Equipment Technologies, Inc | 2006 | 4 | -10.187 | 134.019 | -7.6% | -9.490 | 81.421 | 81.421 | 100.00% | 5.1% | 1.4% |
16 | ARI Network Services, Inc | 2010 | 4 | -0.361 | 19.777 | -1.8% | -0.909 | 10.332 | 5.657 | 54.75% | 100.0% | 34.1% |
17 | CTS Corporation | 2015 | 4 | -9.522 | 484.133 | -2.0% | -0.679 | 96.797 | 10.266 | 10.61% | 0.0% | 34.1% |
18 | Tutogen Medical, Inc | 2005 | 3 | -1.600 | 29.719 | -5.4% | -1.344 | 8.420 | 5.865 | 69.66% | 0.0% | 2.0% |
19 | Actuant Corporation | 2017 | 4 | -118.774 | 1516.955 | -7.8% | -108.415 | 90.845 | 22.671 | 24.96% | 8.9% | 3.6% |
20 | Gateway, Inc | 2004 | 3 | -63.061 | 1825.875 | -3.5% | -58.250 | 589.778 | 517.348 | 87.72% | 3.0% | 0.9% |
21 | PMC-Sierra, Inc | 2005 | 2 | -7.606 | 455.174 | -1.7% | 2.655 | 377.735 | 377.735 | 100.00% | 80.1% | 3.0% |
22 | Zafgen, Inc | 2016 | 3 | -1.536 | 142.712 | -1.1% | -14.675 | 97.720 | 97.720 | 100.00% | 0.0% | 0.8% |
23 | Pemstar, Inc | 2005 | 2 | -7.893 | 371.345 | -2.1% | -13.207 | 68.193 | 62.992 | 92.37% | 0.0% | 2.8% |
24 | Sevcon, Inc | 2013 | 2 | -0.605 | 21.880 | -2.8% | -0.576 | 4.412 | 0.159 | 3.60% | 100.0% | 2.3% |
25 | Intrusion, Inc | 2004 | 4 | -0.139 | 5.316 | -2.6% | -0.788 | 31.508 | 31.508 | 100.00% | 0.0% | 0.0% |
Mean | -13.686 | 491.712 | -3.3% | -7.573 | 107.166 | 82.248 | 64.8% | 23.0% | 7.1% | |||
Median | -5.897 | 156.976 | -2.1% | -2.955 | 68.193 | 23.320 | 87.7% | 3.0% | 2.3% | |||
Mean where VA% < 95% (15 obs) | 41.50% | |||||||||||
1 st Qtr Obs | 0 | |||||||||||
2 nd Qtr Obs | 8 | |||||||||||
3 rd Qtr Obs | 6 | |||||||||||
4 th Qtr Obs | 11 |
RC Total Restructuring Charges (RCPQ) from Compustat, RC% = RC/Assets
Appendix 3
Table 11
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Cready, W.M., Lopez, T.J., Sisneros, C.A. et al. Empirical implications of incorrect special item tax rate assumptions. Rev Account Stud 28, 958–1002 (2023). https://doi.org/10.1007/s11142-021-09661-1
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DOI: https://doi.org/10.1007/s11142-021-09661-1