We analyze a sample of firms accused of fraudulently overstating their earnings and examine the extent, if any, to which they paid additional income taxes on the allegedly fraudulent earnings. Based on restatements of current tax expense adjusted for the tax benefits of stock options, the evidence indicates that many firms included the overstated financial accounting income on their tax returns, thus overpaying their taxes in the process of inflating their accounting earnings. We estimate that the median firm sacrificed eight cents in additional income taxes per dollar of inflated pretax earnings. In aggregate, we estimate that the firms in our sample paid $320 million in taxes on overstated earnings of about $3.36 billion. These results indicate how far managers of firms are willing to go when allegedly inflating earnings.
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STATEMENT BY THE AUTHORThis dissertation has been submitted in partial fulfillment of requirements for an advanced degree at The University of Arizona and is deposited in the University Library to be made available to borrowers under rules of the Library.Brief quotations from this dissertation are allowable without special permission, provided that accurate acknowledgment of source is made. Requests for permission for extended quotation from or reproduction of this manuscript in whole or in part may be granted by the head of the major department or the Dean of the Graduate College when in his or her judgment the proposed use of the material is in the interests of scholarship. In all other instances, however, permission must be obtained from the author.
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ACKNOWLEDGMENTSThis dissertation was prepared at The University of Arizona under the supervision of Professor Dan S. Dhaliwal. I wish to express my sincere gratitude for the gmdance and encouragement that he has provided over the last four years.I would also like to thank the other members of my dissertation committee for their helpfiil suggestions. Specifically, I would like to thank Professors Ed Dyl, Mark Trombley, Shiing-wu Wang and Michael Weisbach. I have also benefited greatiy firom the suggestions and encouragement of Bob Trezevant (honorary committee member).Finally, I ac...
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