Professor Gramlich's published research appears in a variety of well-regarded academic and professional publications iincluding Contemporary Accounting Research, Journal of Accounting Research, Journal of Business Finance and Accounting, Journal of the American Taxation Association, Accounting Horizons, The Tax Adviser, Oil and Gas Tax Quarterly, and Tax Planning--International Review, among others.
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"Are Uncontested Director Elections Meaningful?," written with Brian Miller and Paul E. Fischer (Pennsylvania State University). This paper can be downloaded as a PDF at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=928843.
"Off-balance sheet entities: What motivates firms to sponsor and how sponsorship impacts leverage, total accruals, and return on equity," written with Mei Feng (University of Pittsburgh) and Sanjay Gupta (Arizona State University). This paper can be downloaded as a PDF at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=717301.
"The Revenue Effects of State Corporate Income Tax Accounting Policies," written with Sanjay Gupta (Arizona State University), Mary Ann Hofmann (Andrews University) and Jared Moore (Oregon State University).
Gramlich, J.D., Mayew, W, & McAnally, M.L. (2006). Debt reclassification, earnings persistence, and cost of capital. Journal of Business Finance & Accounting. 1189-1212.
VanderLinden, D., & Gramlich, J.D. (2005). Enhancing risk-controlled returns on excess Japanese yen. Managerial Finance, volume 31, 35-47.
Gramlich, J.D., Limpaphayom, P., & Rhee, S.G. (2004). Taxes, keiretsu affiliation, and income shifting. Journal of Accounting and Economics, volume 37, 203-28.
Gramlich, J.D., & Sørensen, O. (2004). Voluntary management earnings forecasts and discretionary accruals: Evidence from Danish IPOs. European Accounting Review, volume 13, 235-259 .
Gramlich, J.D., & Wheeler, J.E. (2003). How Chevron, Texaco, and the Indonesian Government Structured Transactions to Avoid Billions in U.S. Income Taxes. Accounting Horizons, 107-122.
Gramlich, J.D., & Mais, E. (2003). Insider Trading Around Convertible Security Calls. The Journal of Applied Business Research, 47-54.
Gabrielsen, G., & Gramlich, J.D., & Plenborg, T. (2002). Managerial ownership, information content of earnings, and discretionary accruals in a non-US setting. Journal of Business Finance & Accounting, 967-988.
Gramlich, J.D., McAnally, M.L., & Thomas, J.K. (2001). Balance sheet management: The case of short-term obligations reclassified as long-term debt. Journal of Accounting Research, 283-295.
Choi, W.W., Gramlich, J.D., & Thomas, J.K. (2001). Potential errors in detection of earnings management: Reexamining studies investigating the AMT of 1986. Contemporary Accounting Research, 571-613.
Professor Jeffrey Gramlich Phone: (207) 228-8232 |
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| Almost all company directors are routinely approved in uncontested elections; that is, no outside group contests director nominees via a vote-no campaign or a proxy fight. Because of plurality voting rules, such elections are meaningless, in the sense that the director nominees are almost surely elected. We hand collect over 10,000 individual director vote tallies from these meaningless elections and assess whether they serve as an aggregator of investor perceptions regarding firm management. We document that vote approval is extremely high for almost all nominees in uncontested elections, with the lowest quintile of vote approval still having a mean of 90%. Nonetheless, we provide evidence that uncontested elections serve as meaningful aggregators of investor perceptions by documenting that (1) vote approval is associated with prior-year stock return and prior-year return on assets, and (2) vote approval predicts stock price reactions to subsequent announcements of management turnovers. In addition, we provide evidence that boards are responsive to the sentiment captured in the uncontested vote by documenting that vote approval predicts forced CEO turnover in the twelve months after the annual meeting. Furthermore, we show that other statistics that determine or reflect investor perceptions (i.e., prior stock returns, prior return on assets, and change in institutional ownership) do not subsume the information content in vote approval, which suggests that it captures some unique aspects of investor perceptions. Finally, we document that both the change in institutional ownership, which captures institutions voting with their feet, and the vote approval measure both have predictive value in identifying forced turnovers, which suggests that each type of voting captures different investor perceptions. We conclude that while director do not directly determine who sits on boards, they do reflect investor perceptions regarding board performance and the board appears to be responsive to those perceptions. |
| This paper examines whether and, if so, to what extent, variations in the states’ tax accounting policies used to determine corporate taxable income affect the states’ corporate tax revenues. The calculation of corporate taxable income at the state level typically begins with federal taxable income. Adjustments to this base are first made to determine the nationwide tax base and then to find the amount of income that is apportionable/allocable across states. Next, each state applies an apportionment formula to determine the state taxable income. Both the tax base adjustments and the apportionment formula result from state-specific accounting policy choices. We examine the revenue impact of these choices using a two-stage instrumental variables approach that controls for possible endogeneity between corporate tax revenues and the selection of the sales factor weight in the apportionment formula. |
We provide initial evidence on the economic consequences of a relatively large and fully disclosed reporting decision: changes in debt classification on the balance sheet in accordance with Statement of Financial Accounting Standard No. 6. We examine a sample of 1,648 firm-year observations to determine the effects of this decision on the time-series properties of earnings and cash flows, on a common measure of bankruptcy risk, and on the cost of capital, as measured by bond ratings and equity market values. Our results indicate that earnings become less persistent following the initial balance sheet reclassification of debt from short-term to long-term and that earnings become more persistent after firms cease this reclassification. We also find that reclassification is negatively related to a firms’ debt rating, and that initial reclassification increases the likelihood of a debt-rating downgrade. Lastly, we find that the market value of equity is higher after firms cease reclassifying short-term obligations as long-term debt. Thus, changes in debt classification are empirically linked in predictable directions to subsequent earnings persistence, to concurrent and subsequent bond rating changes, and to subsequent stock values. Taken together, our results imply that debt reclassification and declassification are important indications that may be useful to capital market participants. |
| This paper examines the zero-cost risk reversal as a tool for increasing returns to excess yen while limiting risk. With domestic interest rates near zero, firms holding Japanese yen face little opportunity to deposit cash for meaningful gain unless excess funds are invested in another currency. The conversion strategy is profitable as long as the value of the yen appreciates less than the interest rate differential between the currencies, taking advantage of an empirical regularity frequently referred to as ‘forward exchange bias.’ A problem arises, however, because dollar-yen exchange rate fluctuation adds variability to returns stated in yen. This increased risk counters prudent cash management principles such as stability of returns and liquidity. We consider the possibility that effective use of a zero-cost currency options collar can substantially limit exchange-rate risk and improve returns to yen holders. Data from July 1997 through June 2002 show that a one-year strategy of reinvesting collared monthly Eurodollar returns produces a median annual yen return of 1.76 percent, more than 8 times the median 0.21 percent Euroyen return; risk also increases but approximately 98 percent of returns resulting from this strategy fall between -6.05 percent and +12.58 percent. |
| This paper provides evidence that keiretsu group member firms are subject to lower effective tax rates than independent firms in Japan. As one explanation for this phenomenon, we develop a hypothesis that keiretsu firms strategically shift financially reported income among affiliates in order to reduce overall effective tax rates. Empirical evidence supports this income-shifting hypothesis since the positive relationship between pretax return on firm value and marginal tax rate status is significantly mitigated by keiretsu membership. Further, it appears that keiretsu income shifting activities intensify when Japanese firms face economic recession, contrasting conjecture of weakening strength of keiretsu affiliation during this period. We also find evidence supporting the view that benefactors of shifted income are compensated via increased dividends. |
| This study employs Danish data to examine the empirical relationship between the proportion of managerial ownership and two characteristics of accounting earnings: the information content of earnings and the magnitude of discretionary accruals. In previous research concerning American firms, Warfield et al. (1995) document a positive relationship between managerial ownership and the information content of earnings, and a negative relationship between managerial ownership and discretionary accruals. We question the generality of the Warfield et al. result, as the ownership structure found in most other countries, including Denmark, deviates from the US ownership configuration. In fact, employing a more powerful test than used by Warfield et al., Danish data indicate that the information content of earnings is inversely related to managerial ownership. The results of this study also differ from Warfield in that no evidence links the magnitude of accruals to the extent of managerial ownership. In Denmark, investors place greater weight on earnings reported by managers with small stakes in their firm, and this weight is apparently not related to systematic differences in accrual behavior by these firms. The paper discusses some of the differences in the Danish and American institutional settings that are likely to explain these results. |
| This paper seeks to determine whether Danish managers exercise discretionary accruals to reach earnings forecast targets they voluntarily specify in conjunction with initial public offerings (IPOs). Because the Danish accounting and legal environment is more permissive than the US, we use Denmark as a natural laboratory for learning how business would occur without strict rules, enforcement and sanctions. Danish managers often volunteer pro forma financial statements for results that are expected to occur subsequent to the IPO. We examine a sample of 58 Danish firms that issue voluntary management earnings forecasts in connection with IPOs that occur between 1984 and 1996. The evidence we uncover strongly suggests that pre-managed earnings are adjusted toward these targets. In contrast with Kasznik’s (1999) results related to voluntarily forecasting American firms, managers of Danish firms exercise discretionary accruals to mitigate earnings forecast errors regardless of whether pre-managed earnings are less, or greater, than the IPO forecast amount. |
| This paper explains the transactions, agreements and accounting that Chevron, Texaco, and the Government of Indonesia used to structure transactions that avoided billions in U.S. income taxes. Although ChevronTexaco became a merged entity on October 9, 2001, for many years Chevron and Texaco operated as separate corporations, with each owning 50 percent of a group of primarily non-U.S. companies collectively known as Caltex. Transactions were structured such that Chevron and Texaco subsidiaries paid Caltex excessive prices for Indonesian crude oil, leading to excessive dividend income (with foreign tax credits) and cost of sales deductions on U.S. income tax returns. When one of the equal shareholders purchased more overpriced oil than the other, Caltex paid monthly “Special Dividends” to the “overlifter” that could be construed as cost rebates, not dividends. To compensate for the extra taxes it received, the Government of Indonesia provided Caltex with oil in excess of the amount called for under the formal production-sharing contract (PSC) with the Government of Indonesia. We estimate that this arrangement allowed Chevron and Texaco together to annually avoid paying some $220 million in federal income taxes and $11.1 million in state income taxes from 1964 to 2002. These estimates produce total federal and state taxes avoided of $8.6 billion and $433 million, respectively, for the combined company, ChevronTexaco. |
| This study examines the nature of insider trading of common stock around conversion-forcing calls of convertible securities. Managers of call firms significantly increase their frequency of stock sales after call announcements. Also after the call, substantially fewer call firms are classified as net buyers and a significantly greater number of call firms are classified as net sellers. This evidence suggests that managers alter their trading behavior as though calls are associated with negative information about their firms’ prospects. |
| This paper investigates potential management of balance sheet ratios by a sample of firms that reclassify short-term obligations to long-term debt and subsequently declassify that debt. Although aggregate measures of liabilities and equity remain unchanged when firms reclassify, the practice does increase reported measures of liquidity, such as the current ratio, and long-term leverage. Results suggest that firms reclassify and declassify to smooth reported liquidity and leverage, relative to the prior year and to industry benchmarks. Evidence is also consistent with firms working around restrictive debt covenants. |
| This paper investigates the causes and effects of firms sponsoring special purpose entities (SPEs), as proxied by affiliated limited liability partnerships, limited liability companies, and trusts. We mechanically analyze the Exhibit 21 section of 33,244 SEC Form 10Ks filed with EDGAR between 1994 and 2004 and find that SPE use increased steadily across these 11 years. Greater concentrations of SPE sponsorship are found in the trading, candy and soda and real estate industries. The first of the two-stage least square regression results indicates that large firms with high marginal tax rates favor sponsoring SPEs, particularly if additional capital is needed. Residuals from the first stage are used to create a 0/1 binary variable to indicate whether SPEs are created for opportunistic reasons. In separate second-stage models, SPEs found to be created for opportunistic reasons are negatively related to firm leverage and positively related to total accruals, controlling for other factors known to affect these measures. The interaction of the book-to-market ratio with the opportunistic SPE variable compounds the effect on total accruals. The final analysis examines unexpected return on equity since accruals may be inadequate measures of earnings management because SPEs can be employed to increase both earnings and cash flow. Using stylized models to forecast return on equity, we find that poorly performing firms tend to employ opportunistic SPEs and that these opportunistic SPEs are effective in increasing return on equity. |
| We seek to document errors that could affect studies of earnings management. The book income adjustment (BIA) of the alternative minimum tax (AMT) created apparently strong incentives to manage book income downward in 1987. Five earlier papers using different methodologies and samples all conclude that earnings were reduced in response to the BIA. This consensus of findings offers an opportunity to investigate our speculation that methodological biases are more likely when there appear to be clear incentives for earnings management. A reexamination of these studies uncovers potential biases related to a variety of factors, including choices of scaling variables, selection of affected and control samples, and measurement error in estimated discretionary accruals. And a reexamination of the argument underlying these studies suggests that the incentives to manage earnings are less powerful than initially predicted, and are partially mitigated by tax and non-tax factors. As a result, we believe that the extent of earnings management that occurred in 1987 in response to the BIA remains an unresolved issue. |
