Economics Insights @ CBS

As a tax base, 'consumption' is sometimes argued to be less fair than 'income' because the benefits of not taxing capital income accrue to high-income households. We argue that, despite the common perception that consumption taxation eliminates all taxes on capital income, consumption and income taxes actually treat similarly much of what is commonly called capital income. Indeed, relative to an income tax, a consumption tax exempts only the tax on the opportunity cost of capital. In contrast to a pure income tax, a consumption tax replaces capital depreciation with capital expensing.

The article develops a theoretical framework that explains firms' reactions to accounting standards developed by the U.S. Financial Accounting Standards Board under its extended adoption policy. The proposed theory highlights the differences between recognized and disclosed accounting information and provides a link between a firm's choice of whether to recognize or disclose information under new accounting standards, and stock price behavior around the adoption announcement.

Understanding volatility in emerging capital markets is important for determining the cost of capital and for evaluating direct investment and asset allocation decisions. We provide an approach that allows the relative importance of world and local information to change through time in both the expected returns and conditional variance processes. Our time-series and cross-sectional models analyze the reasons that volatility is different across emerging markets, particularly with respect to the timing of capital market reforms.

A methodology to price American options with finitely many exercise opportunities simulates the evolution of underlying assets via random trees that branch at each of the possible early exercise dates. From these trees, two consistent price estimates are obtained, one biased high and one biased low. These two estimates can be combined to provide a valid, though conservative confidence interval for the option price.