Abstract
The effects of tax rate changes on corporations’ earning management are not fully understood. As a transitional economy, China has listed companies with different ownership and special regulatory rules. We explore under the expectation of tax reduction whether there are differences in the way and degree of earnings management implemented by different types of companies. Our study shows that firms under the anticipation of tax reduction make use of earning management, including delaying sales, taking unusual income-decreasing discretionary accruals, and so on, which leads to lower income in higher tax rate period. We find that private enterprises have more attention to reduce earning in the higher tax rate period than state-owned enterprises (SOEs), indicating that the ownership has effect on the extent of earning management. Moreover, under the specific regulations in Chinese stock market, we find that for those listed companies with negative net profit in the previous year, the priority is how to reverse losses rather than tax saving.
Highlights
Modigliani and Miller [11] believe the tax saving is beneficial to adding firm’ value. erefore, firms with anticipation of tax reduction have motivation to increase the firm value by managing marketing and reporting lower income in the period of high tax rate, deferring sales and earnings to the accounting period of lower tax rate
A regression coefficient for a binary variable represents the difference between the mean of that partition and the intercept
E coefficient of tax is β1, which measures the mean difference of DAP between the firms with anticipation of tax reduction and the ones without it
Summary
Previous research studies find that mobile taxable income flows toward low-tax jurisdictions, either through the movement of real operations or through accounting-based income shifting [4, 5]. Besides income shifting, earning management, as another means of tax saving, is found in the scenario of tax rate changes. As a whole, related empirical research proves that the 1986 Tax Act leads firms to manage earning and report lower income in order to reduce their tax liability in the previous accounting period of tax reduction. We test whether the Chinese companies manage their earnings in order to get tax saving in anticipation of tax reduction. Ird, considering the specific regulations in Chinese stock market, we test, for those listed companies with negative net profit in2006, the priority of them is how to avoid losses for two consecutive accounting periods or getting tax saving in 2007? According to transitional economy backgound, the ownership of companies is considered to test whether different ownerships affect the extent of earning management. ird, considering the specific regulations in Chinese stock market, we test, for those listed companies with negative net profit in2006, the priority of them is how to avoid losses for two consecutive accounting periods or getting tax saving in 2007?
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