Earnings Management in Response to Corporate Tax Rate Changes: Essays on Private Firms

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http://hdl.handle.net/10138/166985
Title: Earnings Management in Response to Corporate Tax Rate Changes: Essays on Private Firms
Author: Sundvik, Dennis
Contributor: Hanken School of Economics, Department of Accounting and Commercial Law, Accounting
Belongs to series: Economics and Society – 303
ISSN: 0424-7256 (printed)
2242-699X (PDF)
ISBN: 978-952-232-317-0 (printed)
978-952-232-318-7 (PDF)
Abstract: The opportunistic aspects of financial reporting have largely been investigated under the umbrella term of earnings management. However, most research is devoted to capital market settings and listed firms in large economies, including the United States in particular. As a contrast, this dissertation examines earnings management based on tax incentives among private firms in European settings. In particular, the four interrelated essays analyze situations where the statutory corporate tax rate in a country is changed and firms are expected to report lower (higher) earnings while the tax rate is higher (lower) to reduce their total tax burden. While these tax changes are introduced to enhance international tax competitiveness, they also give rise to strong incentives for earnings management. For example, when the tax rate is to be decreased, firms may employ various accruals to defer earnings from high to low tax periods. The first essay of the dissertation contributes to the literature by investigating decomposed measures of earnings management instead of relying on a broad measure that does not provide much insight. Based on Swedish private firms, the analyses clearly show income-decreasing earnings management on the aggregate level before two tax rate cuts. The aggregate results are later observed to be largely driven by unexpected changes in accounts receivable. The second essay uses Finnish data and provides evidence that private firms, under certain circumstances, also change the end of the fiscal year to achieve benefits around tax reforms. Further, the analyses demonstrate that a reform that simultaneously lowers corporate tax and hikes dividend tax creates conflicting incentives to manage earnings. The motivation behind the third essay stems from the debate on the appropriate level of book-tax conformity. The essay documents that higher conformity between accounting and tax reporting in jurisdictions is associated with more earnings management in response to an upcoming change in the tax rate. A contribution of this study is the analysis of a clear incentive for earnings management instead of a sole focus on absolute measures. In the fourth and final essay, private firms that use external help in the financial reporting process are separated from firms that do not. The hypothesis is that firms, that handle their accounting function internally, have greater possibilities to influence their reporting opportunistically. The results also suggest that the minority of smaller private firms who perform the tasks in-house, and have the knowledge and resources needed, are able to manage taxes to a larger extent
URI: http://hdl.handle.net/10138/166985
Date: 2016-09-21
Subject: earnings management
tax reforms
discretionary accruals
tax incentives


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