The Impact of Comprehensive Allocation and Flow-Through Method of Accounting for the Income Taxes on the Investment Decision: A Field Experiment.
Date of Award
Doctor of Philosophy (PhD)
Nicholas G. Apostolou
The purpose of this study was to determine whether investment decisions are affected by (1) alternative methods of accounting for income taxes and (2) the magnitude of deferred tax credits in the balance sheet. Financial analysts were asked to estimate net income and stock price, and to provide equivalence intervals as measures of uncertainty. The subjects based their predictions upon financial statements of a real company and selected financial information. Six different forms of the information cue set were used--three accounting methods (deferred method of comprehensive allocation, flow-through, and flow-through with footnote disclosure of deferred taxes as under the deferred method of comprehensive allocation) and two levels of deferred tax credits (high and low). The responses were analyzed using multivariate analysis of variance (MANOVA) in a 3 x 2 factorial experimental design. In addition, the mean square error (MSE) was used as a dependent variable to determine the effect of the accounting methods on the accuracy of the subjects' net income and stock price predictions. The research found evidence that the different methods of accounting for income taxes affect financial analysts' prediction of net income as well as their confidence in their net income predictions. However, the effect did not carry over to the analysts' prediction of stock price and their confidence in their stock price predictions. The magnitude of deferred tax credits in the balance sheet affects stock price prediction, but not net income prediction and the two confidence intervals. Also, financial analysts who received financial statements based on the deferred method of comprehensive allocation made more accurate net income predictions and had greater confidence in their net income predictions. There were no significant differences in the responses of financial analysts who received financial statements based on the flow-through method or flow-through method with footnote disclosure of deferred taxes as under the deferred method of comprehensive allocation.
Khan, Zafar Ullah, "The Impact of Comprehensive Allocation and Flow-Through Method of Accounting for the Income Taxes on the Investment Decision: A Field Experiment." (1987). LSU Historical Dissertations and Theses. 4455.