Pre-tax Profit Research Articles

The Optimal Focus of Transfer Prices: Operations Versus Taxes

This paper studies transfer prices influencing managerial decisions and determining corporate taxes in a multinational firm. Common sense suggests that the transfer price decision should be made to maximize the firm's after-tax profit and thus achieve the optimal trade-off between pre-tax profitability and tax minimization. Based on a model of a decentralized firm facing asymmetric information with respect to operations, I examine why this conclusion does not hold in general. In particular, I demonstrate that a policy of negotiated transfer pricing, under which the divisions exploit their superior information but select the transfer price to maximize the firm's pre-tax profit, is the firm’s optimal organizational choice if the high-tax division's productivity is high. With respect to the firm's discretion over the transfer price, I identify situations where the firm's optimal policy choice does not depend on the arm's length range and where less discretion increases the firm's profitability.

Using strategic analysis to determine why GM‐North America's earnings dropped

AbstractThis article illustrates strategic analysis of operating income, which can be used to gain a better understanding of financial statements—in particular, why corporate or segment profits change from one year to the next. Specifically, the article examines the 2001 pretax profit of General Motors Corporation's North American Operations (GMNA), which declined by $4.4 billion compared with that for 2000. © 2007 Wiley Periodicals, Inc.

International Banking and the Allocation of Risk

Macroeconomic risks could magnify individual bank risk. Mitigating the influence of economy-wide risks on banks could therefore be very important to maintain a smooth-running banking system. In this paper, we explore the extent to which macroeconomic risks affect banks. We use a bank-level dataset on over 2,000 banks worldwide for the years 1995-2002 to study the effect of macroeconomic volatility, the openness of the banking system, and banking regulations on bank risks. Our measure of bank risk is the volatility of banks’ pretax profits. We find that macroeconomic volatility increases banks’ profit volatility and that international openness of the banking system lowers bank risk. We find no impact of banking regulation on profit volatility. Our findings suggest that if policymakers want to lower bank risk, they should seek to lower macroeconomic volatility as well as increase openness in the banking system.

Prophets of future corporate profits: a role for leading indicators in the information sets of security analysts?

This article revisits a model developed by Levi (1980) designed to examine the ability of lagged money supply data to explain future corporate profits. Levi's original US study is developed here in two ways: firstly, it is reassessed using Japanese quarterly pre-tax profits for the period 1973 to 2000 and secondly the model is augmented to include Japan's composite leading index. While the composite leading index is found to have explanatory power at lead times of between 0 and 3 quarters-ahead, the money supply leads at times of between 3 and 5 quarters. In addition, the money supply exhibits the same peak-and-trough lag structure first identified in Levi's US study. This article demonstrates that while a composite leading index may provide short term explanatory power for corporate earnings, the money supply has a distinctive and significant role to play at longer lags. These results suggest that both indicators have a potentially significant role to play as elements within the information sets of secur...

Corporate Taxes and Investment: The Cash Flow Channel

Existing literature focuses on how corporate taxation affects firms’ investment decisions by altering after-tax returns. This paper instead examines how corporate taxation affects investment by reducing the cash flow a firm has available to invest in the current period. I use a sharp nonlinearity in the mapping from pre-tax profitability to taxes created by the tax loss carryforward feature of the tax code to identify the cash flow effect of taxes. The results indicate that firms reduce investment when they pay more taxes, especially when unfavorable capital market conditions create a greater dependence of investment on internal sources of cash.

Stock attractiveness after inclusion in stock index: empirical evidence from KSE 100 index

This paper explores attractiveness of stocks on Karachi Stock Exchange using event study methodology. The main findings of this paper are KSE 100 has included small share capital base manufacturing companies during 2000‐2002. There is no significant difference in pre tax profitability of companies included (excluded) except for their capital structures. The results from event study seem to suggest that KSE100 stocks would be more attractive to passive investors. The passive investors tracking moderate beta stocks on KSE100 index are better off until beta of the stocks climbs up.

Pricing strategies to maximize revenues in the lodging industry

Price-ending strategies may be utilized by hotels to signal value or quality. The current study presents that there is a directional relationship between room rates and price-ending strategies. It demonstrates that as average room rates decrease, the price-ending strategies change from whole dollar practice to dollar and cents practice. Results from the qualitative investigation were compared with the room rates from the Internet for 10 US cities. Based on this study, an innovative pricing strategy is presented with a potential gain of $251 million dollars by conservative estimations (nearly $555 million if estimated liberally) annually for the hotel industry in the USA. These potential sales are about 0.54% of revenues and 3.9% of industry-wide pre-tax profits. Further studies in consumer acceptance of the recommended pricing strategy are suggested.

Analysis of Relative Growth Rates Between Domestic and International Earnings of U.S. Based Publicly Traded Restaurant Firms

ABSTRACT This study explores the relative growth rates in earnings of public restaurant firms for a 20-year period from 1981-2000. No significant differences were found in sales growth between multinational and domestic restaurant firms. However, multinational firms significantly outperformed domestic firms in growth of operating income and pre-tax profitability. Multinational restaurant firms also had significantly lower negative growth in domestic earnings when compared to domestic firms. The results imply that multinational restaurant firms are more efficient than domestic firms in converting sales into profits.

Earnings management and deferred tax

This study analyses the deferred tax provisions of firms during a period in which the firms' incentive to manage earnings may have been be particularly strong and in which firms made disclosures in relation to partial deferred tax provisions which revealed readily their under- or over-provision of deferred tax. Using a sample of 58 firms for the two years 1991 and 1992, the magnitude of the under- or over-provisions found is economically significant, amounting, on average, to around 20% of the maximum potential deferred tax liability and, more important, 9% of profit or loss before tax. This paper takes such under- and over-provision of deferred tax and investigates its relationship with a number of posited explanatory variables - as derived and developed from the earnings management literature. In a multivariate setting it is found that the level of under-/over-provision is related to the following characteristics: whether the firm is reporting a pre-tax loss or a pre-tax profit; the extent of adjustment to prior year tax; and the level of surplus advance corporation tax (ACT). These findings support a general profit- smoothing hypothesis, and the finding in relation to ACT suggests that firms take an overall view in determining the required level of provision in order to manage earnings, rather than concentrating upon particular line items. There is also weaker evidence of a relationship between the level of under-/over-provision and firms' levels of gearing and effective tax rates.

EU financial accounts reports

Acambis is a profitable and cash-generative biotechnology company that is focused on building a substantial franchise in the vaccine space. Its results for the period have benefited significantly from its contract to supply 155 million doses of its ACAM2000 smallpox vaccine to the US Centers for Disease Control and Prevention (CDC). During the year ended 31st December, 2003, Acambis generated profit before taxation (before exceptional items) of £46.8m on sales of £169.1m compared with a profit of £9.6m on sales of £79.7m for the whole of 2002. The pre-tax profit for the year was £39.4m, after taking account of an exceptional cost of £7.4m following a settlement with BTG International Limited to discharge all rights and obligations under a technology licence agreement established in 1994. The profit was earned mainly in the third quarter, with £22.2m earned during the three months ended 30th September, 2003, the company having earned £20.6m for the six months ended 30th June, 2003. Research and development expenditure increased from £16.5m in 2002 to £19.1m in 2003, the result of the progression of the company's products to the later stages of development.

EU financial accounts reports

Acambis is a profitable and cash-generative biotechnology company that is focused on building a substantial franchise in the vaccine space. Its results for the period have benefited significantly from its contract to supply 155 million doses of its ACAM2000 smallpox vaccine to the US Centers for Disease Control and Prevention (CDC). During the year ended 31st December, 2003, Acambis generated profit before taxation (before exceptional items) of £46.8m on sales of £169.1m compared with a profit of £9.6m on sales of £79.7m for the whole of 2002. The pre-tax profit for the year was £39.4m, after taking account of an exceptional cost of £7.4m following a settlement with BTG International Limited to discharge all rights and obligations under a technology licence agreement established in 1994. The profit was earned mainly in the third quarter, with £22.2m earned during the three months ended 30th September, 2003, the company having earned £20.6m for the six months ended 30th June, 2003. Research and development expenditure increased from £16.5m in 2002 to £19.1m in 2003, the result of the progression of the company's products to the later stages of development.

The Financial Crisis in Scottish Football

Individual clubs in Scotland have experienced financial crises on several occasions in the past. But to many observers what we are witnessing at present is a systemic crisis in Scottish football: a common set of problems afflicting all clubs with negative financial implications for all, the crisis in one club or group of clubs threatening to damage the financial stability of other clubs (Rimini Group 2004). As of March 2004 a quarter of Scottish Premier League (SPL) clubs are in administration. The playing staff at another SPL club were obliged to accept substantial pay cuts to avoid the same fate, while the board of another club is seeking to sell its stadium to meet its debts, moving its home matches (average attendance 12,521) to Murrayfield Stadium (capacity 67,500). The combined debt of the twelve SPL clubs is estimated at £190m, some £30-40m higher than the clubs* combined turnover; in the last three seasons only one SPL club has reported a pre-tax profit. The annual turnover of two clubs (the Old Firm of Celtic and Rangers) equates to about 70% of the total turnover of the SPL. Unsurprisingly this dominance is also apparent on the field: no club outside the Old Firm has won the title since 1984/85. Yet, if any SPL club is in administration on 31st May 2004, it will begin season 2004/05 with a tenpoint deduction. Thus any semblance of genuine sporting competition is further threatened by the very real prospect of a quarter of the SPL beginning next season 10 points adrift from other clubs. To those not familiar with the business of Scottish football these facts may be quite extraordinary. The explanations of how Scottish football ended up in this situation are perhaps no less so.

DIVIDEND POLICY, TRADING CHARACTERISTICS AND SHARE PRICES: EMPIRICAL EVIDENCE FROM EGYPTIAN FIRMS

For a sample of 94 firms, using data up to 1999, we find that retentions are more significant than dividends in determining prices of shares that are actively traded on the Egyptian stock market. However, for non-actively traded shares, the accounting book value is the most important determinant. Reductions in dividends are associated with a lack of liquidity and profitability. Dividend increases are linked to higher pre-tax operating profit effects, which outweighed post-tax effects. As to aspects that influence dividend payout ratios of actively traded firms, important factors are gearing and the market to book value, the latter a surrogate for investment opportunities. For non-actively traded firms, a more complex pattern emerges.

New developments in executive compensation

The purpose of this article is to learn the new developments in executive compensation. The article is based on research undertaken by various organisations. The trend for top executive compensation in the United States increasingly is being tied to individual and corporate performance. Of the compensation packages, there is an increasing trend of paying equity (stock and stock options) over cash. One conflict would be that executives would control so much stock that their decisions will be aimed at keeping the stock price up, as opposed to promoting the long‐term health of the company. Corporate performance was analysed by considering three widely used measures: total return to shareholders; rate of return on equity; and improvements in pretax profit margins. Although CEO’s compensation is at very high levels, it represents a fractional part of a company’s expenses. The positive impact a great CEO can have is enormous and companies can not afford to lose it.

Grundfos on the prowl in wastewater market

The first six months of 2003 have proved to be good ones for the Grundfos Group. It achieved a pre-tax profit of 374 million Danish kroner — an increase of 162 million Danish kroner compared with the same period last year. According to group president Jens Jørgen Madsen this is the result of a healthy combination of growth in sales, tight cost-control and improved efficiency. It is also made against a background of reports of economic stagnation or little growth in most areas from the pump sector generally. At a presentation to journalists from the pump and water industries at the end of August, Grundfos made a number of statements on its plans for its Wastewater segment. Among its objectives for the immediate future were: Visit www.worldpumps.com for the latest pump industry news

Occupational health in the pharmaceutical industry: an overview.

The pharmaceutical industry is an important contributor to the health of the UK economy, with 65 000 people directly employed and many more in support industries [1]. It delivered a net trade surplus of £2.6 billion to the UK economy in 2002 and was rated as the highest value-adding industry, with £78 000 of value added to the economy per industry employee in the same period. It is a highly competitive global industry with significant high-risk, long-term investment in increasingly costly drug discovery and development activity. It takes ~10–12 years to bring a new medicine to market and the average development cost is £350 million, with high attrition rates. The rewards are high for successful transnational players, with pre-tax profits of 30% on sales [2]. The industry presents particular challenges to occupational health practitioners engaged in the delivery of effective occupational health services. The demands of a highly technical work environment must be blended with the need to maintain effective health management in a fast-paced, changing and pressured global business climate. This, combined with a high level of focus on innovation and productivity through human capital development strategies, provides a rich mix of factors to take into account when selecting and implementing health interventions that are appropriate, risk-targeted, cost-effective and acceptable to employees and management. An overview of health hazards in the industry published in 1947 provides a familiar list of headings and exposure issues to today’s pharmaceutical occupational health practitioner. The contemporary collection of reviews in this issue of Occupational Medicine provides an update: so, has anything changed beyond the product names that populate the lists of recognized causes of exposure-related health effects? [3] Providing rational, risk-based advice on the prediction, prevention and management of exposure-related health effects from a diverse and novel range of workplace health hazards requires increasingly specialized technical competences and industry knowledge. Binks reviews occupational toxicology and the control of exposure to pharmaceutical agents at work [4]. He provides insight into the high level of resource investment and multidisciplinary expertise applied to predicting the potential adverse effects of occupational exposure. The industry has pioneered occupational hazard categorization systems and led the way in developing novel approaches to the containment of highly potent biologically active substances. Heron and Pickering review the published evidence for health effects related to exposure to active pharmaceutical ingredients [5]. The literature continues to be dominated by well-known historical clusters of occupational illness burden associated with particular classes of drug compounds and there is a paucity of recently published data. Is this a cause for optimism that the battle has been won? Laboratory animal allergy (LAA) remains an important and potentially life-threatening cause of occupational sensitization, often with significant career implications for those affected. Gordon and Preece [6] present a summary of the state of the art in preventing this condition. They offer encouragement that investment in a policy-driven integrated approach to allergen exposure control can result in a reduction in incidence. The lower level of importance of occupational health interventions, such as health surveillance, compared to other components of LAA risk management systems is noted. However, occupational health practitioners remain well placed to play a key role in facilitating and co-ordinating the Director, Southern Client Services, Aon Health Solutions, 2 Circus Place, London EC2M 5RS, UK. Tel: +44 20 7638 3422; e-mail: alister.scott@aers.aon.co.uk Occupational Medicine 2003;53:354–356 DOI: 10.1093/occmed/kqg114

Rundfos posts strong earnings growth

The Grundfos Group has reported a pre-tax profit of DKr374 million for the first six months of 2003, up an impressive DKr162 million or 76% on the same period last year. This is a short news story only. Visit www.worldpumps.com for the latest pump industry news.

Revolution or evolution?

A shift to an open-access model of publishing would clearly benefit science, but who should pay?

The impact of HR practices on the performance of business units

This article examines the impact of HR practices and organisational commitment on the operating performance and profitability of business units. Using a predictive design with a sample of 50 autonomous business units within the same corporation, the article reveals that both organisational commitment and HR practices are significantly related to operational measures of performance, as well as operating expenses and pre‐tax profits.

The evolution of corporate charitable contributions in the UK between 1989 and 1999: industry structure and stakeholder influences

According to The Guardian’s 2001 Giving List,British businesses contributed, in cash or in kind,around d700million to charities in the financialyear 2000/1. This represents 4.7% of the totalincome of the voluntary sector and, on average,around 0.4% of pre-tax corporate profits. Chari-table contributions may have significant implica-tions for corporate performance (Navarro 1988,Hillman and Keim 2001) as firms respond toincreasing stakeholder pressure for socially re-sponsible behaviour (Kapstein 2001, Berman et al.1999). Corporate charitable contributions provideone mechanism through which firms can influencepolicy makers and demonstrate commitment to asocially responsible agenda (Navarro 1988). Thispaper explores the evolution of corporate chari-table donations