Do taxes affect firmsÕ asset write-downs? Evidence from discretionary write-downs of equity investments in Italy

Giampaolo Arachi () and Valeria Bucci

No EC0002, Working Papers from University of Salento; Department of Management, Economics, Mathematics and Statistics

Abstract: If assets write-downs are tax-deductible from the corporate income tax base, companies could discretionally use them to reduce their tax burden. This paper aims at investigating whether and to what extent taxes affect the firmÕs discretionary choice to write-down long term equity investments. The analysis is based on panel data for Italian companies. In the period 1998Ð2006 the Italian corporate income tax was reformed several times. In particular, the tax deductibility of write-downs of equity investment was repealed in 2004. The paper exploits the ensuing high cross-sectional and timeseries variation in the marginal tax rate (measured before the decision to write-down equity investments) in order to identify tax effects. The econometric analysis delivers strong evidence that taxes affect the decision to write-down. The paper also provides evidence of an interaction between tax minimization, financial reporting costs and agency costs.

Keywords: corporate taxation; asset impairments; write-downs of equity investments; tax planning; financial reporting; agency relationship (search for similar items in EconPapers)
JEL-codes: H25 H32 K34 M41 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2013-12, Revised 2013-12
New Economics Papers: this item is included in nep-acc, nep-law, nep-pbe and nep-pub
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