Abstract not found

Multiple activities may be separated financially, allowing each to optimize its financial structure, or combined in a firm with a single optimal financial structure. We consider activities with nonsynergistic operational cash flows, and examine the purely financial benefits of separation versus merger. The magnitude of financial synergies depends upon tax rates, default costs, relative size, and the riskiness and correlation of cash flows. Contrary to accepted wisdom, financial synergies from mergers can be negative if firms have quite different risks or default costs. The results provide a rationale for structured finance techniques such as asset securitization and project finance. DECISIONS THAT ALTER THE SCOPE of the firm are among the most important faced by management, and among the most studied by academics. Mergers and spinoffs are classic examples of such decisions. More recently, structured finance has seen explosive growth: Asset securitization exceeded $6.8 trillion in 2004, and Esty and Christov (2002) report that in 2001, more than half of capital investments with costs exceeding $500 million were financed on a separate project basis. 1 Yetfinancial theory has made little headway in explaining structured finance. Positive or negative operational synergies are often cited as a prime motivation for decisions that change the scope of the firm. A rich literature addresses the roles of economies of scope and scale, market power, incomplete contracting, property rights, and agency costs in determining the optimal boundaries of the firm. 2 But operational synergies are difficult to identify in the case of asset securitization and structured finance.

This paper examines the evolution of the corporate profit base and the relationship between book income and tax income for U.S. corporations over last two decades. The paper demonstrates that this relationship has broken down over the 1990s and has broken down in a manner that is consistent with increased sheltering activity. The paper traces the growing discrepancy between book and tax income associated with differential treatments of depreciation, the reporting of foreign source income, and, in particular, the changing nature of employee compensation. For the largest public companies, proceeds from option exercises equaled 27 percent of operating cash flow from 1996 to 2000 and these deductions appear to be fully utilized thereby creating the largest distinction between book and tax income. While the differential treatment of these items has historically accounted fully for the discrepancy between book and tax income, the paper demonstrates that book and tax income have diverged markedly for reasons not associated with these items during the late 1990s. In 1998, more than half of the difference between tax and book income- approximately $154.4 billion or 33.7 percent of tax income- cannot be accounted for by these factors. This paper proceeds to develop and test a model of costly sheltering and

This paper examines the evolution of the corporate profit base and the relationship between book income and tax income for U.S. corporations over last two decades. The paper demonstrates that this relationship has broken down over the 1990s and has broken down in a manner that is consistent with increased sheltering activity. The paper traces the growing discrepancy between book and tax income associated with differential treatments of depreciation, the reporting of foreign source income, and, in particular, the changing nature of employee compensation. For the largest public companies, proceeds from option exercises equaled 27 percent of operating cash flow from 1996 to 2000 and these deductions appear to be fully utilized thereby creating the largest distinction between book and tax income. While the differential treatment of these items has historically accounted fully for the discrepancy between book and tax income, the paper demonstrates that book and tax income have diverged markedly for reasons not associated with these items during the late 1990s. In 1998, more than half of the difference between tax and book income – approximately $154.4 billion or 33.7 percent

this paper. On the street, TPS also are know as "capital securities" and Euromoney refers to them as "preference shares." Akselrad and Bernstein [1994], Kalser [1997], Khana and McConnell [1998], Padgett [1998], and Sinkey [1998] describe various aspects of these securities' innovations. 10 Goldman Sachs, MIPS/QUIPS Market Update, January 26, 2000. 9

In this paper we investigate the existence and magnitudes of implicit taxes on equity. Specifically, using futures market data to control for risk, we test whether the pre-tax returns on bonds are higher than the pre-tax returns on four stock indices during the period 1993-1999. We compare the risk-free stock index returns (on perfectly hedged portfolios) to risk-free returns on taxable bonds, and estimate implicit taxes on equity. We find a moderate but significantly positive implicit tax for each stock index. Moreover, we find that cross-sectionally, implicit taxes are much larger for the lowdividend NASDAQ 100 than for the other three, substantially higher dividend-yielding indices. We also find that estimated implicit taxes have fallen significantly during the sample period. Our findings are consistent with a multiple clientele explanation, in which more than one tax clientele is the marginal investor in the stock market. I.

confidential and protected by data non-disclosure agreements under the Internal Revenue Code, all statistics are presented in the aggregate. Any opinions are those of the author and do not necessarily reflect the views of the

workshop participants at the 1999 Duke/North Carolina Accounting Research Fall Camp and the Duke/North Carolina public finance workshop. We also acknowledge the contribution of I/B/E/S International Inc. for providing earnings per share forecast data available through the Institutional Brokers Estimate System. These data have been provided as part of a broad academic program to encourage earnings expectations. The views expressed herein are those of the authors and do not necessarily reflect the position of the National

NBER pre-conference meeting held in Cambridge MA on July 27, 2006; we thank

This paper examines the evolution of the corporate profit base and the relationship between book income and tax income for U.S. corporations over last two decades. The paper demonstrates that this relationship has broken down over the 1990s and has broken down in a manner that is consistent with increased sheltering activity. The paper traces the growing discrepancy between book and tax income associated with differential treatments of depreciation, the reporting of foreign source income, and, in particular, the changing nature of employee compensation. For the largest public companies, proceeds from option exercises equaled 27 percent of operating cash flow from 1996 to 2000 and these deductions appear to be fully utilized thereby creating the largest distinction between book and tax income. While the differential treatment of these items has historically accounted fully for the discrepancy between book and tax income, the paper demonstrates that book and tax income have diverged markedly for reasons not associated with these items during the late 1990s. In 1998, more than half of the difference between tax and book income- approximately $154.4 billion or 33.7 percent of tax income- cannot be accounted for by these factors. This paper proceeds to develop and test a model of costly sheltering and