A cross-sectional analysis of the adoption of Statement of Financial Accounting Standards (SFAS) No. 96, 'Accounting for Income Taxes

The positive accounting literature emphasizes the identification of systematic patterns in accounting choice, thereby providing accounting users with a useful predictive model of the accounting procedure. The primary purpose of this study is to extend this line of research to the area of accounting for income taxes. In this dissertation, I examined the existence of systematic differences among firms which choose different adoption years in conjunction with Statement of Financial Accounting Standards (SFAS) no. 96, "Accounting for Income Taxes." With the adoption of SFAS 96, most firms benefit from higher earnings and lower deferred tax liabilities, even though there is no direct effect on cash flows. To investigate a cross-sectional difference between early adopters and late adopters, a logit model is employed: the dependent variable takes a value of one for early adopters, and zero for late adopters.;The results generally show that late adopters tend to (1) be large in size; (2) have more subsidiaries; (3) have a greater percentage earnings increase from the previous year in the pre-adoption earnings; (4) be manager-controlled firms with a low percentage of stock held by insiders; and (5) be less financially-troubled than early adopters. However, a two-stage stock market test does not support the political cost hypothesis: even though large firms tend to adopt income-increasing SFAS 96 late, that may not be for political reasons.