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

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.

Household consumption and home production at retirement in Thailand: evidence from a regression discontinuity approach

This paper uses Socio-Economic Surveys covering the period from 2013 to 2019 and the 2015 Time Use Survey to investigate the extent to which household consumption changes at retirement in Thailand. A fuzzy regression discontinuity design is applied to evaluate the retirement effect on total household expenditure and expenditures on four major categories: food-at-home, work-related items, non-durable entertainment, and others. The results reveal that retirement decreases household expenditure by 11%. Further investigations show that the dramatic declines in expenditures on work-related and non-durable entertainment contribute significantly to the spending drop at retirement. The magnitudes of the declines are more pronounced for low-income and low-wealth households. The results also indicate that the retirees spend more leisure time on home production activities after retirement. Once accounting for this effect, it finds that the drop in total household expenditure decreases to 6%. These results suggest that the sizable consumption expenditure drop at retirement is due to substituting away from market purchased goods toward home-produced goods.

A Regression Discontinuity Design Framework for Controlling Selection Bias in Evaluations of Differential Item Functioning

Differential item functioning (DIF) is often used to examine validity evidence of alternate form test accommodations. Unfortunately, traditional approaches for evaluating DIF are prone to selection bias. This article proposes a novel DIF framework that capitalizes on regression discontinuity design analysis to control for selection bias. A simulation study was performed to compare the new framework with traditional logistic regression, with respect to Type I error and power rates of the uniform DIF test statistics and bias and root mean square error of the corresponding effect size estimators. The new framework better controlled the Type I error rate and demonstrated minimal bias but suffered from low power and lack of precision. Implications for practice are discussed.

Labor Market Returns to Vocational Secondary Education

We study labor market returns to vocational versus general secondary education using a regression discontinuity design created by the centralized admissions process in Finland. Admission to the vocational track increases initial annual income, and this benefit persists at least through the mid-thirties, and present discount value calculations suggest that it is unlikely that life cycle returns will turn negative through retirement. Moreover, admission to the vocational track does not increase the likelihood of working in jobs at risk of replacement by automation or offshoring. Consistent with comparative advantage, we observe larger returns for people who express a preference for vocational education. (JEL D15, I21, I26, J24, J31, O33)

The Origins of Common Identity: Evidence from Alsace-Lorraine

We study how more negative historical exposure to the actions of nation-states—like war, occupation, and repression—affects the formation of regional identity. The quasi-exogenous division of the French regions Alsace and Lorraine allows us to implement a geographical regression discontinuity design at the municipal level. Using measures of stated and revealed preferences, we find that more negative experiences with nation-states are associated with a stronger regional identity in the short, medium, and long run. This is linked to preferences for more regional decision-making. Establishing regional organizations seems to be a key mechanism to maintaining and strengthening regional identity. (JEL H77, N43, N44, N93, N94, Z13)