The practice of using earnings management methods under tax incentives absence and financial incentives restriction conditions

2021 ◽  
Vol 22 (8) ◽  
pp. 868-886
Author(s):  
Lyudmila S. MAKHAN'KO
Keyword(s):  
Earnings Management ◽  
Financial Incentives ◽  
Tax Incentives ◽  
Tax Burden ◽  
External Financing ◽  
Financial Indicators ◽  
Unique Character ◽  
Dividend Payments ◽  
Limited Application ◽  
General Scientific

Subject. This article analyzes the regularities of the processes of application of earnings management methods in the absence of tax incentives and in conditions of limited use of financial incentives. Objectives. The article aims to identify trends in the use of earnings management methods in the absence of tax incentives and in conditions of limited application of financial ones, and substantiate a set of analytical procedures for their identification to enhance the reliability of the organization's financial situation assessment. Methods. For the study, reviewing academic papers on the subject matter, I used the general scientific cognition methods of comparison, generalization, grouping, systematization, and the principle of historicism. Results. The article defines the most important financial incentives, including the tax ones, when earnings management is aimed at reducing or redistributing the tax burden, and financial incentives in terms of positioning in the stock market and adjusting dividend payments. The article finds the regularities of changes in individual financial indicators helping identify enterprises that likely use earnings management methods in terms of accounting for exchange rate differences. Conclusions and Relevance. The research shows that the probability of applying earnings management methods remains in the absence of discernible financial benefits in the short term in terms of reducing the tax burden or the possibility of attracting additional external financing in the financial markets. The unique character of the research lies in the study of the practice of applying earnings management methods in the absence of apparent financial incentives.

scholarly journals Financial reporting incentives: Taxation and external financing need

2020 ◽  
Vol 12 (1) ◽  
pp. 57-69
Author(s):  
Nino Serdarević ◽  
Ajla Muratović-Dedić
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Tax Burden ◽  
External Financing ◽  
Financial Reports ◽  
Debt Contracting ◽  
Taxable Income ◽  
Conservative Accounting ◽  
Reporting Incentives ◽  
Aggressive Financial Reporting

Earnings management literature extensively explores tax regime and debt contracting as possible incentives in financial reporting. Firms engage with aggressive financial reporting to bias earnings in periods when the need for external financing increases. Contrary to this, the tax burden represents incentive for more conservative reporting. We argue that the level of firm's financial reporting aggressiveness is not constant but rather floating from period to period, directly affecting the quality of financial reports. We assume that firm's management on its own discretion determines the level of conservatism, balancing between these two incentives. The prevailing of two incentives, the need for external financing and the tax burden, determines the level of conservatism in particular reporting period. We hypothesised that the reduction in tax burden incentive overcomes the debt contracting incentive in the years of decreasing external financing need, implying more conservative accounting to balance between economic and taxable income. The total accruals are used as a measure of earnings management reflected to working capital accruals. The data analysis conducted on financial reports of 297 firms in the time-series of five years shows a significant correlation between total accruals, external financing needs and difference between economic and taxable income.

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.

scholarly journals Effects Of Key Financial Indicators On Earnings Management In Korea’s Ready Mixed Concrete Industry

2017 ◽  
Vol 33 (2) ◽  
pp. 329-342 ◽  
Author(s):  
Geun Bae Jang ◽  
Weon-Jae Kim
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Accounting Information ◽  
Cash Flows ◽  
Financial Indicators ◽  
Ability Level ◽  
Operating Income ◽  
The Relationship ◽  
Ready Mixed Concrete ◽  
Mixed Concrete

Earnings management is the practice of deriving certain benefits by intervening in external financial reporting or misleading certain stakeholders through adjustments to accruals without cash flow involvement or with affecting cash flows through real activities. Using the models of Kothari et al. (2005) and Cohen et al. (2008) for accrual-based earnings management (AEM) and real activities earnings management (REM), respectively, we examined whether relationships exist between key financial indicators, such as cash flows from operations, operating income, and debt dependency level, and AEM and REM in the ready mixed concrete (RMC) industry in Korea. This study is the first to investigate earnings management in Korea’s RMC sector. Results showed that operating income and cash flows from operations are significantly negatively related to AEM and REM, consistent with the findings of previous research. By contrast, debt dependency exhibits no significant relationship with AEM and REM, contradicting the findings of most previous studies. As a moderating variable, operating income affects the relationship between cash flows from operations and earnings management with only REM. On these bases, we can infer that earnings management in the Korean RMC industry responds differently to key financial indicators with regards to AEM and REM practice. Overall, companies in the industry implement aggressive earnings management depending on operating income and cash generation ability level rather than debt dependency level. These findings provide important insights for people who are interested in accounting information on the RMC industry in Korea.

scholarly journals Factors of fraud occurrence and corporate governance structures: Evidence from emerging market Malaysia

2014 ◽  
Vol 11 (3) ◽  
pp. 135-153 ◽  
Author(s):  
Zuraidah Mohd Zam ◽  
Wee Ching Pok ◽  
Abdullahi D. Ahmed
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Emerging Market ◽  
Rank Test ◽  
Executive Directors ◽  
Dividend Payments ◽  
Signed Rank ◽  
Signed Rank Test ◽  
A Company ◽  
Financial Environment

The main objective of this research is to examine the possible factors of the corporate environment which may contribute to the occurrence of fraud by investigating whether there are any differences in corporate governance, earnings management activities and compensation structures between scandal and non-scandal firms. The sample of this study consists of 57 scandal firms matched with non-scandal firms in the Malaysian financial environment. The scandal firms are the Malaysian publicly listed companies which have been reported to be involved in fraud over the period 1995 to 2008. Non-parametric tests such as Paired t-test and the Wilcoxon signed-rank test are conducted to investigate the differences in characteristics of the two sub-groups (scandal firms vs. non-scandal firms). The results show that the independent directors of scandal firms were holding fewer directorships. In addition, there is evidence to show that scandal firms are reporting lower earnings and therefore paying lower dividends. However, no significant differences are found in the compensation structures of the executive directors in both sets of our sample. The results of the logistic regression reveal that factors such as the nature of dividend payments; the effectiveness of independent committees and the influence of powerful/dominant positions in a company may have been contributing to fraud.

The Effect of Earnings Management on Dividend Policy in Pakistan

2017 ◽  
Vol 9 (1-3) ◽  
Author(s):  
Faiza Saleem ◽  
Mohd Norfian Alifiah
Keyword(s):  
Earnings Management ◽  
Dividend Policy ◽  
Oil And Gas ◽  
Stock Exchange ◽  
Annual Data ◽  
Cross Sectional ◽  
Return On Equity ◽  
Dividend Payments ◽  
Oil And Gas Companies ◽  
The Impact

The aim of this study was to find out the impact of earnings management on dividend policy of oil and gas companies listed at the Karachi stock exchange. The study uses annual data of oil and gas companies for the period from 2008 to 2015. The dependent and independent variables are dividend policy and earnings management and the three control variables are leverage, return on equity and firm size. Modified cross sectional Jones model (1995) was used for calculating discretionary accruals which has been used as proxy for earnings management whereas measurement of dividend policy has been proxy by dividend payout. The findings from regression analysis indicate that earnings management has insignificant relationship with dividend policy of selected firms in Pakistan. Financial crisis in the world and economic decline period are the main reasons of this relationship. In the decline period the firms try to increase manipulation in earnings as a result the company starts reducing dividend payments. It is concluded that there are some other factors that may influence the pattern of dividend payment in the firms.

Features of Financial and Legal Incentives of Investment Activities in the Regions

2018 ◽  
Vol 9 (1) ◽  
pp. 210
Author(s):  
Nikita K. POPADYUK ◽  
Olga V. PANINA ◽  
Sergey G. EREMIN ◽  
Andrey I. GALKIN ◽  
Alexander A. SAVELYEV
Keyword(s):  
Financial Incentives ◽  
Russian Regions ◽  
Investment Activity ◽  
Scientific Methods ◽  
Judicial Practice ◽  
Analysis And Synthesis ◽  
Logical Method ◽  
General Scientific ◽  
The Subject ◽  
Definition Of

Research of features of financial and legal incentives of investment activities in the regions. Methodological basis of the study raised issues were the following: general scientific methods of cognition generalization, analogy, analysis and synthesis, elaboration, comparison, logical method, etc. Conducted interdisciplinary analysis of literature and sources on stimulating investment activities, with particular emphasis given to the Institute financial and legal incentives. Formed the author's definition of the term ʼfinancial and legal stimulus of investment activity of regionsʼ. Studied types of financial and legal incentives of investment activities of the regions. Analyzed regional legislation and judicial practice on the subject of study places financial incentives in the legal field of regional legislation. Identified conflicts in the system of financial and legal incentives of investment activities of the regions. A proposal to optimize the preliminary control of the Prosecutor's offices of the legality of the investment legislation, in particular, the structure of which has different financial and legal incentives of investment activities in Russian regions.

scholarly journals Analysis of financial indicators used to assess the sustainability of companies

2020 ◽  
Vol 208 ◽  
pp. 03049
Author(s):  
Temirkhan Mukhambetov ◽  
Farida Yerdavletova ◽  
Karlygash Kurbanova ◽  
Zhanar Mukhametzhanova ◽  
Kamilla Sadvakassova
Keyword(s):  
Comparative Analysis ◽  
Financial Stability ◽  
Analytical Approach ◽  
Expert Assessment ◽  
Financial Indicators ◽  
Large Share ◽  
Scientific Methods ◽  
General Scientific ◽  
The Stability

The authors present a methodology for using financial indicators to assess the value of companies. The article is dedicated to a comprehensive research of EBITDA. As a research objective, the authors identified an attempt to solve the problem of companies’comparability with identical proportions of financial results, the possibility of identifying the most financially stable companies. Based on the analysis of various interpretations, applying of this indicator in different directions is considered. As a component of various coefficients that characterize the company’s financial stability, it’s recommended to use the EBITDA indicator. The behooves and opportunities that open up when using it are revealed. The research shows to the need to apply this indicator, because this coefficient is able to more fully reveal the stability of the company, by increasing the amount of real profit, the amount of which is limited due to the presence of a large share of non-cash expenses in companies. In the process of research, such general scientific methods as monitoring, comparison, description, systematic and analytical approach, comparative analysis, scientific abstraction, expert assessment, analysis of reasons and consequences were used.

scholarly journals Model of Growth of the Russian Corporations: Impaction of Institutional Factors

2014 ◽  
Author(s):  
Elena Silova ◽  
Irina Belova ◽  
Daria Bents
Keyword(s):  
Growth Rate ◽  
Oil And Gas ◽  
Institutional Factors ◽  
Tax Burden ◽  
Sales Revenue ◽  
Dividend Payments ◽  
Administrative Personnel ◽  
Macroeconomic Indicators ◽  
Huge Impact

In modern conditions corporations are a core of economic system and many macroeconomic indicators depend on growth of corporations. Quality and intensity of growth of corporations depend on many factors, both internal, and external. Institutional factors, including efficiency of the contract relations, level of tax burden, quality of corporate institutes have huge impact on growth of corporations. The purpose of this work – to reveal factors of growth of the Russian corporations and to construct models of the Russian corporations’ growth in a branch section. In research the assessment influence of tax loading on efficiency of the contract relations and growth of the Russian corporations is carried out. The analysis of growth of the Russian corporations in various branches (oil and gas, metallurgy, power industry) is carried out and models of their growth taking into account such factors, as tax burden, level of dividend payments and level of compensation of the administrative personnel are constructed. The degree of tax burden to efficiency improvement of contractual relations in Russian corporations was analyzed. The growth rate of sales revenue was taken as an indicator of the corporation efficiency. The factors influencing the growth rate of sales revenue were analyzed, the basis for the analysis was Cobb-Douglas production function with some clarifications.

Sign in / Sign up

Export Citation Format

Share Document