Business Group, Income Tax Reform and Corporate Real Earnings Management

Abstract

This paper analyzes the differences in earnings management between business and non-business groups in one year after the enforcement of Reform of Income Tax Act in 2007. It finds that facing the reduction in taxes, business groups tend to choose real earnings management to reduce current earnings, Compared with non-business groups. The analysis based on debt contracts, capital market pressure, political costs and agency costs further shows that the negative real earnings management tends to be more serious in business groups with lower non-tax costs, non-state-owned background and higher divergence between cash flow right and control right. These conclusions provide evidence for tax collection, regulation in securities market, investment by investors, and so on.