Causal effects of corporate taxes on private firms' earnings management: a regression discontinuity analysis

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Gaowen Kong
Keyword(s):  
Earnings Management ◽  
Regression Discontinuity ◽  
Tax Incentives ◽  
Causal Effects ◽  
Private Firms ◽  
Effective Tax Rate ◽  
Tax Collection ◽  
Content Type ◽  
Tax Rate ◽  
Earnings Information

PurposeThe authors emphasize the information role of earnings management and how it may be used to “mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers.” Specifically, the authors examine the causal effect of tax incentives on private firms' earnings management based on a corporate tax reform in China.Design/methodology/approachIn December 2001, China implemented a tax collection reform which moved the collection of corporate income taxes from the local tax bureau to the state tax bureau. This reform results in exogenous variations in the effective tax rate among similar firms established before and after 2002. The authors apply a regression discontinuity design and use the generated variation in the effective tax rate to investigate the impact of taxes on firm earnings management.FindingsThe authors find that tax reduction substantially increases private firms' incentives to manage earnings information, and such effect is particularly pronounced when tax collection intensity and government interventions are low. Further evidence shows that lower tax rates stimulate firms' investment, inventory turnover and recruitment of skilled human capital. A plausible mechanism is that private firms signal a promising outlook by managing earnings to attain greater financing and improve investment/operation levels when financial constraints are removed.Originality/valueFirst, the authors present the causal effects of tax incentives on private firm's earnings management, which deepens the authors’ understanding on the determinants of firm's earnings information production. Second, this study also contributes to the literature on tax-induced earnings management. Third, the authors believe that this topic offers clear policy implications and would be of particular interest to regulators.

Taxation in a mixed economy: the case of China

2017 ◽  
Vol 34 (1) ◽  
pp. 49-61 ◽  
Author(s):  
Davidson Sinclair ◽  
Larry Li
Keyword(s):  
Income Tax ◽  
Central Government ◽  
Corporate Income Tax ◽  
Tax Rates ◽  
Government Ownership ◽  
Effective Tax Rate ◽  
Effective Tax Rates ◽  
Content Type ◽  
Tax Rate ◽  
For Profit

Purpose The purpose of this paper is to investigate how Chinese firms’ ownership structure is related to their effective tax rate. The People’s Republic of China provides an interesting environment to examine the corporate income tax. Government has significant ownership stakes in the for-profit economy and state-owned enterprises (SOEs) are liable to the corporate income tax. This is very different to most other economies where SOE tends to dominate the not-for-profit economy and pays no corporate income tax. Government ownership also varies between the central government and local government in addition to state asset management bureaus. This provides a rich institutional background to examining the corporate income tax. Design/methodology/approach A panel data analysis approach is used to examine relationship between ownership structure and effective tax rates of all public firms in China from 1999 to 2009. Findings The authors report that effective tax rates do appear to vary across the ownership types, but that SOEs pay a statistically higher effective tax rate than to non-state-owned. In addition, local government owned SOE pay higher effective tax rates than central government and SAMB owned SOE. The authors also investigate Zimmerman’s (1983) political cost hypothesis. Unfortunately, these results are econometrically fragile with the statistical significance of those results varying by empirical technique. Originality/value This paper provides insight into government ownership and taxation in China.

Receptiveness of effective tax rate to firm characteristics: an empirical analysis on Indian listed firms

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ajaya Kumar Panda ◽  
Swagatika Nanda
Keyword(s):  
Regression Model ◽  
Firm Size ◽  
Manufacturing Firms ◽  
Debt Ratio ◽  
Effective Tax Rate ◽  
Content Type ◽  
Tax Rate ◽  
Tax Shield ◽  
Dynamic Panel Regression ◽  
Debt Tax Shield

Purpose The purpose of this paper is to empirically investigate the factors deriving effective tax rate (ETR) for Indian manufacturing firms in different sectors. The study also tries to analyze the sensitiveness of ETR because of shocks on its key determinants. Design/methodology/approach The study is using Arellano–Bond dynamic panel regression model to identify the key drivers of ETR, and impulse response functions of panel vector auto-regression model to analyze the response of ETR because of one standard deviation (SD) shock to its key determinants. Findings This study concludes that ETR is significantly explained by firm size, profitability, growth rate and non-debt tax shield in most of the sectors, and debt ratio, asset tangibility and age of the firms are impacting ETR differently across sectors. In case of entire manufacturing sector, firm size, profitability, growth and non-debt tax shield are driving ETR positively and asset tangibility is driving ETR negatively. Interest coverage ratio (ICR) and firm age are not significant drivers of ETR. ETR is positively related with firm size, but responses negatively when there is an immediate shock to firm size. Similarly, ETR is negatively related with asset tangibility, but responds positively following an immediate shock to it. Overall, ETR is more sensitive and responses significantly because of shocks in firm size, profitability, growth, asset tangibility and non-debt tax shield whereas, the response is very marginal following shocks to debt ratio, ICR and age of the firm. Research limitations/implications Firm managers may find the study useful to understand the receptiveness of ETRs at each sector level. The empirical findings are not only validating the theoretical developments but also providing a root cause analysis to the firm managers to understand the cause and consequence of ETRs for firms at different sectors. Originality/value Empirically investigating the factors driving ETR and analyzing its sensitiveness because of one SD shock on its key determinants for Indian manufacturing firms from different sectors is the originality of this study. Developing a strong theoretical background and empirically validating it through advanced methodology makes the study unique.

Derivative financial instruments, tax aggressiveness and firm market value

2014 ◽  
Vol 6 (4) ◽  
pp. 376-390 ◽  
Author(s):  
Tao Zeng
Keyword(s):  
Market Value ◽  
Analytical Models ◽  
Option Value ◽  
Financial Instruments ◽  
Effective Tax Rate ◽  
Public Companies ◽  
Content Type ◽  
Tax Rate ◽  
Tax Aggressiveness ◽  
Using Data

Purpose – The purpose of this study is to examine the relationship of using derivative financial instruments, tax aggressiveness and firm market value. Design/methodology/approach – This paper develops analytical models and designs an empirical study. Findings – Using data from large Canadian public companies, this paper finds that a firm’s realized losses or unrealized gains from using derivatives are negatively associated with its effective tax rate, and a firm’s realized losses or unrealized gains from using derivatives are positively associated with its market value. Research limitations/implications – This study simplifies the analytical model by separating the firm’s intrinsic market value from the tax-timing option value. In a more general framework, the tax-timing option value could be subsumed in the firm’s market value, and the firm’s market value would be determined endogenously. Originality/value – This study develops a framework to show how firms exploit the tax-timing option by using derivatives. It is the first study to conclude that a motive for firms to use derivatives is to exploit the tax-timing option.

scholarly journals Earnings Management, Effective Tax Rate (ETR) and Book-Tax Gap (BTG)

2018 ◽  
Vol 3 (1) ◽  
pp. 33-43
Author(s):  
Jasrial Jasrial ◽  
Susy Puspitasari ◽  
Ali Muktiyanto
Keyword(s):  
Earnings Management ◽  
Behavior Management ◽  
Banking Sector ◽  
Capital Intensity ◽  
Jel Classification ◽  
Tax Rates ◽  
Effective Tax Rate ◽  
Effective Tax Rates ◽  
Tax Rate ◽  
Tax Gap

Objective - This research examines the effect of company size, changes in out-cash flow, return on assets, conservatism, and profit levelling on earnings management. Methodology/Technique - The results of this research show that banking capital structure, capital intensity, intensity of inventory, and intensity of R & D have a significant impact on effective tax rates. Further, the results also show that, with respect to the non-banking sector, R & D expenditure contributes significantly to effective tax rates. Simultaneously, earnings management and effective tax rates, as well as other factors, also have an effect on book tax gap. Findings - This study shows that profit management has a significantly positive effect on book tax gap, and effective tax rates has a significant negative effects o book tax gap. In terms of the non-banking sector, earnings management and effective tax rate have no effect on book tax gap. Deferred tax expenses have a lower capability to detect earnings management than accrual, in both the banking and non-banking sector. Novelty - The study of management capabilities optimizes the role of book tax gap and effective tax rate for earning management. Both tax management and earnings management are closely related to behavior management in managing a company based on the agency theory. Furthermore, the study identifies a relationship between earnings management and book tax gap. Type of Paper: Empirical Keywords: Book Tax Gap; Effective Tax Rate; Earnings Management; Accrual Total; Indonesia. JEL Classification: H26, H29.

Tax avoidance and audit report lag in South Africa: the moderating effect of auditor type

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Hela Gontara ◽  
Hichem Khlif
Keyword(s):  
Tax Avoidance ◽  
Fiscal Year ◽  
Audit Report ◽  
Effective Tax Rate ◽  
Audit Risk ◽  
Content Type ◽  
Tax Rate ◽  
Big 4 ◽  
High Degree ◽  
The Impact

Purpose The purpose of this paper is to examine the association between audit report lag (ARL) and tax avoidance and test whether external auditor type affects this relationship. Design/methodology/approach ARL is measured as the number of days from fiscal year-end to the date of the auditor’s report, while tax avoidance is measured using effective tax rate. Findings Using a sample of 45 South African companies over the period of 2010–2013, the authors document that ARL is positively associated with tax avoidance and this relationship remains positive when the company is audited by a Big-4 audit firm and not significant when the company is audited by a non-Big-4. Originality/value The authors’ findings have important implications for auditors aiming to reduce audit risk as they may consider the impact of tax avoidance and pay more attention to companies with a high degree of tax avoidance.

No woman, no aggressive tax planning? A study on CEO gender and effective tax rates in the Lithuanian retail sector

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Aras Zirgulis ◽  
Maik Huettinger ◽  
Dalius Misiunas
Keyword(s):  
Retail Sector ◽  
Tax Rates ◽  
Effective Tax Rate ◽  
Effective Tax Rates ◽  
Content Type ◽  
Tax Rate ◽  
Tax Aggressiveness ◽  
Female Ceos ◽  
Opposite Sex ◽  
Ceo Gender

PurposeThe purpose of this paper is to investigate whether switching to a CEO of the opposite sex affects the tax aggressiveness of firms.Design/methodology/approachRegression analysis using a difference in difference approach and propensity score matching on a dataset of 8,798 firms from 2007 to 2017.FindingsThe authors find evidence that switching to a female CEO reduces the effective tax rate paid, implying a higher level of tax aggressiveness.Social implicationsThe findings contradict the narrative that female CEOs are less tax aggressive.Originality/valueThe authors are the first (to the best of the authors' knowledge) to specifically investigate if changing the CEO gender has an impact on the effective tax rate paid by the firm.

Auditor-provided tax services and long-term tax avoidance

2015 ◽  
Vol 14 (3) ◽  
pp. 285-305 ◽  
Author(s):  
Brian Hogan ◽  
Tracy Noga
Keyword(s):  
Negative Relationship ◽  
Tax Avoidance ◽  
Cost Benefit ◽  
Tax Rates ◽  
Negative Consequences ◽  
Effective Tax Rate ◽  
Accounting Firms ◽  
Content Type ◽  
Tax Rate

Purpose – The purpose of this paper is to determine the association between auditor-provided tax services (APTS) and long-term corporate tax rates. Design/methodology/approach – The paper uses empirical data and multivariate regression models to explore the relationship between a firm’s use of APTS and their long-term effective tax rate. Findings – An economically and statistically significant long-term negative relationship was found between firm levels of APTS and taxes paid. Further, a portion of this benefit is lost for some firms when returning to their auditor for tax services even after a short break. Originality/value – This paper contributes to the debate regarding the value of APTS by providing evidence of the apparent long-term negative consequences to firms who reduce their reliance on APTS, perhaps even through the engagement of separate accounting firms for their audit and tax functions, although these consequences may be mitigated upon return with a significant increase in APTS. However, this is the first study, to our knowledge, to explore, in a long-term setting, the consequences of a firm’s return to their auditors for a non-audit service previously reduced or terminated. Additionally, further incremental contributions are made to other studies that look at APTS and tax avoidance by studying the long-term relationship which allows firms to consider the cumulative cost/benefit relationship between independence and knowledge spillover.

Bias in Quarterly Estimates of Annual Effective Tax Rates and Earnings Management

2012 ◽  
Vol 34 (1) ◽  
pp. 31-53 ◽  
Author(s):  
Joseph Comprix ◽  
Lillian F. Mills ◽  
Andrew P. Schmidt
Keyword(s):  
Earnings Management ◽  
Earnings Forecast ◽  
Tax Rates ◽  
Effective Tax Rate ◽  
Effective Tax Rates ◽  
Tax Rate ◽  
Sarbanes Oxley ◽  
Jel Classifications

ABSTRACT We investigate whether quarterly annual effective tax rate (ETR) estimates are systematically biased in comparison to year-end actual ETRs. We find that estimated annual ETRs in the first, second, and third quarters are systematically higher than year-end ETRs. We then investigate whether firms' overstatement of quarterly ETRs creates slack that is used for earnings management. We find that quarterly ETR increases are more likely to be reversed in subsequent quarters when firms would have missed their analysts' earnings forecast absent the reversal. Finally, we show that in the years subsequent to the passage of the Sarbanes-Oxley Act (SOX), changes in the ETR continue to be associated with earnings management. These results, documenting patterns of annual ETR estimates and revisions, contribute to research about how earnings management is accomplished. JEL Classifications: H25; M41.

scholarly journals The effect of foreign ownership structure and foreign commissioners board on tax avoidance

2019 ◽  
Vol 22 (2) ◽  
Author(s):  
Eddy Suranta ◽  
Pratana Puspa Midiastuty ◽  
Hairani Ramayanti Hasibuan
Keyword(s):  
Cash Flow ◽  
Ownership Structure ◽  
Stock Exchange ◽  
Linear Regression Analysis ◽  
Tax Avoidance ◽  
Tax Incentives ◽  
Foreign Ownership ◽  
Effective Tax Rate ◽  
Tax Rate ◽  
Operating Cash Flow

This study aims to provide empirical evidence that there is an influence of foreign ownership structure and the foreign board of commissioner against tax avoidance. In addition, the study Also tested based on tax avoidance tax incentives and non-tax incentives. The dependent variable in this study is tax avoidance is measured using five proxies items, namely the effective tax rate (ETR), cash effective tax rate (CETR), the book-tax difference (BTD), tax expenses to operating cash flow (TEOCF), and Tax Paid to Operating Cash Flow (TPOCF). The independent variables are foreign ownership structure, the foreign board of commissioner, tax incentives (profitability) and non-tax incentives (leverage and firm size). The theory tested in this research is the legitimacy theory. The sample of this research is the non-financial sector 53 companies listed in Indonesia Stock Exchange from 2012 to 2016. Data collection method using a purposive sampling technique.The method of analysis in this study using multiple linear regression analysis. The results of this study indicate that the structure of foreign ownership effect on tax avoidance through proxy ETR and CETR. The Board of Commissioners has an effect on tax avoidance through the proxy of TEOCF and TPOCF. Profitability has an effect on tax avoidance through proxy CETR, TEOCF, and TPOCF. Leverage Affects tax avoidance through proxy ETR, TEOCF, BTD, and TPOCF. Company size has no effect on tax avoidance. The results of this study will be useful for Academics to PROVE that foreign ownership structures and the foreign board of Commissioners are Able to limit tax avoidance measures, investors in decision-making, regulators in regards to the presence of the foreign board of Commissioners, as well as Researchers for future reference

scholarly journals MANAJEMEN LABA DAN PERENCANAAN PAJAK SEBAGAI SUMBER LARGE POSITIVE BOOK-TAX DIFFERENCES TERHADAP PERSISTENSI LABA

2018 ◽  
Vol 10 (2) ◽  
Author(s):  
Liean Winata Merrysa ◽  
Nurul Aisyah Rachmawati
Keyword(s):  
Panel Data ◽  
Earnings Management ◽  
Stock Exchange ◽  
Tax Planning ◽  
Least Square ◽  
Earnings Persistence ◽  
Manufacturing Companies ◽  
Effective Tax Rate ◽  
Tax Rate

<p><em>This study replicates Blaylocket al. (2012). Through this research, the writer wanted to analyze the influence of earnings management and tax planning as source of Large Positive Book-Tax Differences (LPBTD) to earnings persistence. This research uses panel data of manufacturing companies listed on Indonesia Stock Exchange for the period of research year 2012-2013. The data is analyzed with Pooled Least Square. Unfortunately, the authors can not prove that earnings management as a source of LPBTD can weaken earnings persistence. The result of earnings persistence estimation is exactly the opposite. This condition may occur because the action of earnings management by managers is viewed in terms of efficiency contracting perspective. In addition, the authors also can not prove that tax planning as a source of LPBTD strengthens the profit persistence. According to Blaylock et al. (2012), this happens because the measurement of cash effective tax rate can not be reviewed only with period of 5 (five) years.</em></p><em>Keywords:Persistensi profit, profit management, tax planning, Large positive book-tax differences</em>

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