The Effects of Alternative State Regimes on Firms' Accounting and Financing Decisions.

Abstract This paper examines three states, which impose three different types of taxes on corporations at the state level in the U.S., that are, California, Michigan, and Texas. Decisions made by firm managers in each state are compared to find evidence of the effects of differing tax regimes. Specifically, this paper examines the relation between state tax regimes and the level of debt and discretionary accruals. Previous studies of state tax regimes have focused primarily on how state and local taxes influence business location decisions. Other studies have investigated the impact of federal taxes on management decisions regarding debt levels, compensation, dividends, investments, organizational forms and accounting method choices. This study expands this literature by examining how management decisions about debt and accounting methods are affected by state taxes. The results indicate that state taxes affect managers' accrual decision. Inasmuch, state tax legislators should consider the effects of State taxes on firms before making changes in tax law.