Managing discretionary accruals in response to reductions in corporate tax rates in Canada, Malaysia and Singapore

Abstract

The accounting literature provides much evidence of incentives to manage earnings ( Healy 1985, Jones 1991, Moses 1987). Evidence on using discretionary current accruals as an earnings management tool to benefit from income tax rate changes in the USA is given in Guenther (1994). The present study provides empirical evidence on the management of discretionary current accruals by nonmanufacturing corporations in Canada, Malaysia and Singapore in response to changes in the statutory corporate income tax rates in these countries. It also tests competing hypotheses relating to managing discretionary current accruals, specifically the incentives provided by the positive accounting variables of political costs and debt covenants as proxied by firm size and firm leverage, respectively. Our analysis provides evidence on managing discretionary current accruals by companies in Canada and Singapore similar to that found by Guenther (1994) for the USA. The weaker Malaysian results can be attributed to cultural factors.