Taxes and Financial Reporting: Evidence from Discretionary Investment Write-Offs in Italy

Giampaolo Arachi () and Valeria Bucci

No 3261, CESifo Working Paper Series from CESifo

Abstract: This paper provides further empirical evidence on the relationship between taxes and financial reporting by focusing on accounting decisions to write-offs equity investments. The analysis is based on panel data for Italian companies. In the period 1998-2006 the Italian corporate income tax has been reformed several times. In particular the tax deductibility of write-offs of equity investment was repealed in 2004. The paper exploits the ensuing high cross-sectional and times series variation in the marginal tax rate to identify tax effects. The econometric analysis delivers strong evidence that taxes affect the probability of write-offs. In contrast there is no evidence that taxes affect the magnitude of the write-offs. The paper also tests for the existence of a trade-off between tax minimization and non tax costs such as financial reporting costs and agency costs. Surprisingly, the evidence of such trade-off is rather weak.

Keywords: corporate taxation; write-offs of equity investments; financial reporting; tax planning (search for similar items in EconPapers)
JEL-codes: H25 H32 K34 M41 (search for similar items in EconPapers)
Date: 2010
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