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MAGYAR NEMZETI BANK the reported material cost rao was reduced by 1.32 percentage point among switching firms from 2005 to 2006, while the reducon was nearly doubled from 2006 to 2007. A striking difference in the cost rao paerns is that the reducon in reported material cost is twice as large aer the reform. The easiest items to over-report, and then to suddenly stop over-reporng, are material cost items. Material cost can be manipulated easily as the stock level of the material items can be altered by stang items were outdated, disused, expired or stolen. Moreover, it is unlikely that suddenly the producon funcon changed for these corporaons and they managed to reduce their producon costs so suddenly. Wage cost was unlikely to be over-reported before the reform as the employer social security contribuon on wage cost was much higher than the corporate income tax. So that we do not see decreasing wage cost shares. The findings of sharp changes in material cost reporng, and no significant decreases in other cost items reporng, suggest accounng reporng responses behind the profit rao changes. Figure 5 Pre-reform and aer reform changes in reported cost raos (Note: The grey bars represent the average changes in different cost raos for firms switching from below the threshold profit rate to above before the reform (from year 2005 to 2006), while the blue bars represent those switching aer (from year 2006 to 2007).) .0111 .0148 Average change in cost ratios -.03 -.02 -.01 0 .01 -.0132 -.0251 -.0025 -.0047 -.0191 -.0188 .0015 .0019 material cost other cost service cost wage wage benefit Change in 2005-2006 Change in 2006-2007 To formalize the results in Figure 5, I esmate the below regression, where I also include control variables. CR i 0 1 T i j X j,i i , (9) where the dependent variable, CR i is the change in the specific cost item amount level compared to the net turnover: CR i c y i,t c y i,t1 . (10) The logit regression in Table 17 in the appendix reports that though there are differences between firms in the two groups, but the differences are small in magnitude, also the esmated marginal effects in column three show that these differences have marginally negligible effect on the probability whether a firm is present in the treatment or in the control group. Adding addional pre-treatment control variables helps account for differences between the two groups, and increase the credibility of the idenficaon. In the regressions T i is a treatment dummy for changes between 2006 and 2007, while the baseline category includes those firms that switched between 2005 and 2006. The control variables in the regression include lag distance to the threshold, lag profit, lag tax base, lag net turnover, lag employment, lag net immaterial assets, lag net property, lag net machines, lag share 20 MNB WORKING PAPERS 3 • 2016
EVIDENCE FOR ACCOUNTING RATHER THAN REAL RESPONSES Table 3 Changes in reported cost structure Dep. varbs. N 15762 Profit rao Material cost/ turnover Other cost/ turnover Service cost/ turnover Changes in Wage cost/ turnover Regressions without controls Wage benefit/ turnover Depr. / turnover Sold goods/ turnover T i 1 -0.002*** -0.012*** 0.002 0.003 0.004** 0.00 -0.002* -0.03 -0.01 (treat. group) (0.000) (0.003) (0.002) (0.003) (0.002) (0.001) (0.001) (0.033) (0.017) Sold services/ turnover Constant 0.026*** -0.013*** -0.005** -0.019*** 0.011*** 0.002** -0.002*** 0.09*** 0.043*** N 15548 (0.000) (0.002) (0.002) (0.003) (0.001) (0.001) (0.001) (0.025) (0.013) Regressions with controls T i 1 -0.002*** -0.0124*** 0.002 0.001 0.004** 0.00 -0.001 -0.04 -0.005 (treat. group) (0.000) (0.003) (0.002) (0.003) (0.002) (0.001) (0.001) (0.032) (0.0164) Constant 0.016*** -0.0151*** -0.001 -0.037*** 0.018*** -0.00 0.004*** 0.146** 0.053* (0.000) (0.004) (0.004) (0.006) (0.003) (0.002) (0.002) (0.061) (0.031) Controls X X X X X X X X X N 15548 Regressions with controls including industry T i 1 -0.002*** -0.0127*** 0.002 0.001 0.004** 0.00 -0.001 -0.038 -0.005 (treat. group) (0.000) (0.003) (0.002) (0.003) (0.002) (0.001) (0.001) (0.033) (0.016) Constant 0.016*** -0.0162* 0.003 -0.03*** 0.015*** -0.002 0.003 0.211** 0.032 (0.001) (0.008) (0.007) (0.01) (0.006) (0.003) (0.001) (0.105) (0.053) Controls X X X X X X X X X Note: The regressions in the first panel include only a treatment dummy and a constant, in the second panel pre-reform lag profit, lag tax base, lag net turnover, lag employment, lag net immaterial assets, lag net property, lag net machines, lag share capital, lag distance to cutoff and age and age square are added, while in the third panel industry dummies are added also. The control group includes firms switching from below the threshold profit rate to above before the reform (from year 2005 to 2006), the treatment group includes firms switching aer the reform (from year 2006 to 2007). Standard errors are shown in parentheses and stars indicate stascal significance level. * = 10% level, ** = 5% level, *** = 1% level. capital, age, age square and industry codes. The top panel of Table 3 shows the coefficients of these regressions without control variables. The grey bars in Figure 5 represent changes in the control group that is the constant in the regression, and the blue bars represent changes in the treatment group that is the sum of the constant and the coefficient of the treatment dummy, T i in the regression. As a common pracse in the literature, variables are top coded to avoid that the result might be driven by outliers. Variables taking also negave values are yearly winsorized at the boom 1% and at the top 99%, and variables without negave values are winsorized at the top 99%. The final sample in the regressions contains firms with variables that were not dropped during the winsorizaon process. The change in profit rao defined by the legislaon for corporaons that switched from below the cutoff to above in the analyzed me period can be seen in the first column of Table 3. The posive coefficient of the constant confirms that those corporaons are in the sample whose profit rao shied to the right. Firms in the control group increased their profit rao on average by 2.6 percentage point, while those in the treatment group by 2.4 percentage point. The regression esmaon in the second column indicates that the average change in material cost nearly doubled aer the reform. Before the reform the material cost rao decreased on average by 1.32 percentage point for switching companies in the sample, and by 2.51 percentage point aer the reform. Surprisingly the change in service cost is not significantly different between the two groups as it is shown in column four. This could be because, although it is relavely easy to overreport service costs, it is not as easy to suddenly decrease them, probably due to long term agreements. The difference between other cost items and wage benefits are not significant either. The finding of twice as large reducon changes in material cost reporng suggests accounng reporng responses are the reasons for the bunching at the cutoff. For robustness check I re-esmate the exercise with firms switching from the 0 - 2 range to a wider range of 2 - 8 percent, and get similar results (see Table 19 in the appendix). MNB WORKING PAPERS 3 • 2016 21
Page 1: Pálma Mosberger Accounting versus
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