TAX CHARACTERISTICS AND INCOME STATEMENT STRUCTURE AS DETERMINANTS OF MANAGERIAL PERCEPTIONS OF BUSINESS EXPENDITURES

While Kahneman and Tversky's (1979) prospect theory and the hypothesis that the frame of reference affects the decision have been confirmed by research, little is known about the choice of the frames themselves. This paper investigates the frames affecting managerial perceptions of tax and non-tax expenditures. The principles of categorization described by Henderson and Peterson (1992) provide the basis for hypotheses that managers will perceive or frame tax expenditures differently from other non-tax cash outflows. In addition, the structure of the income statement is hypothesized to create a frame affecting the perceptions of both tax and non-tax expenditures. Finally, these perceptions are linked to differential responses to expenses.; These hypotheses were tested in an experiment using a within-subjects design. The two continua of cost/loss and benefit/no benefit proposed by Lipe (1993) were used to test whether these two categorization methods affected managers' perceptions. Experienced businesspersons and MBA students with business experience were used as subjects.; The results of this investigation show that both income statement structure and tax attribute are significant in determining perceptions of cost or loss. Similar support is found for differences in the perceived benefit for these expenditures. Contrary to Lipe (1993), this experiment found significant differences between the perception of cost or loss and the perception of a benefit from the expense.; While there was strong statistical support for the frame of reference used in evaluating these expenditures, there was only moderate support for this frame affecting economic decisions. These results are similar to the findings of Fischhoff (1983).; This study extends our understanding of accounting by providing information concerning managers' perceptions of tax and non-tax expenditures. It shows, in a context free of ethical consequences, that payments of taxes are perceived differently than other payments. In addition, it shows that the structure of accounting provided by the income statement affects the perceived benefits of payments.