Restricted Item. Print thesis available in the University of Auckland Library or may be available through Inter-Library Loan. This thesis examines some economic factors that influence managements' choice of accounting methods. It is argued that managers' incentives to voluntarily present current cost financial statements, to adopt the "credit to sales" method of accounting for export tax credits, and to select the partial tax allocation procedure are a function of the firm's political costs. Unlike previous tests where the political cost hypothesis is not substantiated, this study links the hypothesis to specific regulations, tax reform recommendations, the politicization of export tax credits, and the deferred tax literature. This enables the identification of more refined proxies for political costs that are then linked to specific accounting choices, thereby enhancing the internal validity of the study because interpretation problems are reduced.The hypothesis is also developed that firms close to their interest coverage and leverage constraints in debt agreements are more likely to adopt the "credit to sales" method of accounting for export tax credits and partial tax allocation, respectively. These accounting procedures loosen the restrictions, thereby mitigating the adverse effects of being unable to issue new debt and avoiding infringement and costly renegotiation. Because the accounting choices can be the result of opportunistic accounting decisions taken by managers after the debt contracts are negotiated, it is necessary to identify a sample of firms that have discretion over the choice of these accounting methods. The examination of contract details provides a more powerful test of the debt covenant hypothesis and contrasts with previous studies where such an examination is typically not conducted.The evidence presented supports the following general conclusions:(1) Firms that voluntarily present current cost financial statements are high political cost companies and those most likely to benefit from tax relief if the tax system was modified to incorporate current cost adjustments. This finding is consistent with the explanation that accounting choices are driven by incentives created by the political process.(2) Because a firm's tax rate is monitored by politicians, unions, and watchdog groups, and firms with low tax rates are castigated for not bearing their share of the tax burden, firm with low tax rates are more likely to adopt the "credit to sales" method of accounting for export tax credits. The likelihood of selecting this method is also a positive function of firm size, the magnitude of the export tax credits received (other proxies for political visibility), and an inverse function of the interest cover ratio (a proxy for debt contracting costs). These findings are consistent with the political and debt contracting cost explanations for accounting choices.(3) Firms that select the partial tax allocation method are large and have large deferred tax balances. This is consistent with the argument that companies that are visible because of their size and that receive large wealth transfers through the tax system prefer an accounting method that reduces the size of this perceived wealth transfer. This finding supports the political cost explanation for accounting choices.
