Earnings Management Choices in Response to Tax Rate Increases PDF Download
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Author: Michael Firth
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper investigates the underexplored issue of whether and how firms manage their earnings when tax rates increase. We hypothesize and find that firms generally choose to manage their taxable income upward in a book-tax non-conforming manner rather than in a book-tax conforming manner before a tax rate increment, which in turn reduces the book-tax difference as well as the detection risk of earnings management. These results suggest that firms give more weight to tax incentives and tax audit or regulatory inspection risks than to boosting financial reporting income in tax management. However, when firms have higher earnings management incentives or lower tunneling incentives (i.e., non-state-owned enterprises), we find that they manage their taxable income and book income upward together (i.e., in a book-tax conforming manner), whereas their counterparts (i.e., state-owned enterprises) do not. Overall, our paper contributes to the literature by demonstrating the interplay of tax, tunneling and earnings management incentives in influencing tax management strategies.
Author: Michael Firth
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper investigates the underexplored issue of whether and how firms manage their earnings when tax rates increase. We hypothesize and find that firms generally choose to manage their taxable income upward in a book-tax non-conforming manner rather than in a book-tax conforming manner before a tax rate increment, which in turn reduces the book-tax difference as well as the detection risk of earnings management. These results suggest that firms give more weight to tax incentives and tax audit or regulatory inspection risks than to boosting financial reporting income in tax management. However, when firms have higher earnings management incentives or lower tunneling incentives (i.e., non-state-owned enterprises), we find that they manage their taxable income and book income upward together (i.e., in a book-tax conforming manner), whereas their counterparts (i.e., state-owned enterprises) do not. Overall, our paper contributes to the literature by demonstrating the interplay of tax, tunneling and earnings management incentives in influencing tax management strategies.
Author: G. Nathan Dong
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We provide evidence on how statutory corporate tax rate changes affect income-shifting behavior. Our difference-in-differences identification strategy exploits the 112 staggered changes in corporate income tax rates across the 33 U.S. states during the period 1989-2012. We find that accounting earnings are more likely to be managed upward in response to state tax cuts and more significantly among firms with higher prior-year return on assets. Most firms do not manage earnings downward in response to tax increases, probably because significant tax increases usually occur when states are fiscally constrained and downward smoothing of reported earnings can certainly draw scrutiny from cash-strapped state governments. More importantly, firms had higher ROA but experienced lower stock returns prior to tax cuts do use discretionary accruals to increase earnings in the year of the tax cut and reduce earnings in the year of the tax rise, a strategy that improves returns to shareholders. This evidence suggests that firms often trade off the tax benefits of earnings management to maximize firm value for a lower risk of being detected by the regulators and other market participants.
Author: Justin John Hill
Publisher:
ISBN:
Category : Corporate profits
Languages : en
Pages : 218
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Book Description
Author: David Hay
Publisher: Routledge
ISBN: 1136210350
Category : Business & Economics
Languages : en
Pages : 387
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Book Description
Auditing has been a subject of some controversy, and there have been repeated attempts at reforming its practice globally. This comprehensive companion surveys the state of the discipline, including emerging and cutting-edge trends. It covers the most important and controversial issues, including auditing ethics, auditor independence, social and environmental accounting as well as the future of the field. This handbook is vital reading for legislators, regulators, professionals, commentators, students and researchers involved with auditing and accounting. The collection will also prove an ideal starting place for researchers from other fields looking to break into this vital subject.
Author: Joshua Ronen
Publisher: Springer Science & Business Media
ISBN: 0387257713
Category : Business & Economics
Languages : en
Pages : 587
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Book Description
This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?
Author: Kirsten A. Cook
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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Book Description
Dhaliwal, Gleason, and Mills (DGM 2004) document that firms manage earnings through decreases in effective tax rates (ETRs) between the third and fourth quarters. We investigate how firms' investments in tax planning impact this association between ETR changes and earnings management incentives. We also study two additional questions related to this association. First, we examine the impact of firms' choices to purchase tax services from providers other than their auditors on their use of third-to-fourth-quarter ETR changes. Second, we explore whether the Sarbanes-Oxley Act of 2002 (SOX) altered firms' propensity to engage in earnings management using changes in ETRs. For firms that would miss consensus earnings forecasts in the absence of ETR changes, higher tax service fees paid to auditors are associated with greater reductions in ETRs between the third and fourth quarters. Among firms that do not purchase tax services from their auditors, companies that would miss their earnings forecasts absent ETR changes also experience greater third-to-fourth-quarter reductions in ETRs than companies that would otherwise meet or beat these estimates. We find no statistically significant impact of the passage of SOX on the relation between tax fees paid to auditors and third-to-fourth-quarter decreases in ETRs for firms that would miss their earnings targets without managing tax expense. However, for firms not purchasing tax services from their auditors, a negative association exists between third-to-fourth-quarter ETR changes and missing income goals absent ETR changes in the pre-SOX period, but our tests fail to detect this relation in the post-SOX period.
Author: Eero Kasanen
Publisher:
ISBN: 9789517020633
Category :
Languages : en
Pages : 38
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Book Description
Author: United States. Congress. House. Committee on Ways and Means
Publisher:
ISBN:
Category : Business & Economics
Languages : en
Pages : 196
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Book Description
Author: Myron S. Scholes
Publisher:
ISBN: 9781292065571
Category :
Languages : en
Pages : 528
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Book Description
For MBA students and graduates embarking on careers in investment banking, corporate finance, strategy consulting, money management, or venture capital Through integration with traditional MBA topics, Taxes and Business Strategy, Fifth Edition provides a framework for understanding how taxes affect decision-making, asset prices, equilibrium returns, and the financial and operational structure of firms. Teaching and Learning Experience This program presents a better teaching and learning experience-for you and your students: *Use a text from an active author team: All 5 authors actively teach the tax and business strategy course and provide students with relevant examples from both classroom and real-world consulting experience. *Teach students the practical uses for business strategy: Students learn important concepts that can be applied to their own lives. *Reinforce learning by using in-depth analysis: Analysis and explanatory material help students understand, think about, and retain information.
Author: John R. Graham
Publisher: Now Pub
ISBN: 9781601986122
Category : Business & Economics
Languages : en
Pages : 176
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Book Description
Accounting for Income Taxes is the most comprehensive review of AFIT research. It is designed both to introduce new scholars to this field and to encourage active researchers to expand frontiers related to accounting for income taxes. Accounting for Income Taxes includes both a primer about the rules governing AFIT (Sections 3-4) and a review of the scholarly studies in the field (Sections 5-8). The primer uses accessible examples and clear language to express essential AFIT rules and institutional features. Section 3 reviews the basic rules and institutional details governing AFIT. Section 4 discusses ways that researchers, policymakers, and other interested parties can use the tax information in financial statements to better approximate information in the tax return. The second half of the monograph reviews the extant scholarly studies by splitting the research literature into four topics: earnings management, the association between book-tax differences and earnings characteristics, the equity market pricing of information in the tax accounts, and book-tax conformity. Section 5 focuses on the use of the tax accounts to manage earnings through the valuation allowance, the income tax contingency, and permanently reinvested foreign earnings. Section 6 discusses the association between book-tax differences and earnings characteristics, namely earnings growth and earnings persistence. Section 7 explores how tax information is reflected in share prices. Section 8 reviews the increased alignment of accounting for book purposes and tax purposes. The remainder of the paper focuses on topics of general interest in the economics and econometric literatures. Section 9 highlights some issues of general importance including a theoretical framework to interpret and guide empirical AFIT studies, the disaggregated components of book-tax differences and research opportunities as the U.S. moves toward International Financial Reporting Standards (IFRS). Section 10 discusses econometric weaknesses that are common in AFIT research and proposes ways to mitigate their deleterious effects.
