Effects of corporate taxes on private firms’ earnings management: A regression discontinuity analysis

2020 ◽  
Author(s):  
Gaowen Kong ◽  
Dongmin Kong
Keyword(s):  
Earnings Management ◽  
Regression Discontinuity ◽  
Private Firms ◽  
Corporate Taxes

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

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Gaowen Kong
Keyword(s):  
Earnings Management ◽  
Regression Discontinuity ◽  
Tax Incentives ◽  
Causal Effects ◽  
Private Firms ◽  
Effective Tax Rate ◽  
Tax Collection ◽  
Content Type ◽  
Tax Rate ◽  
Earnings Information

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.

How Do Private Firms Respond to Corporate Taxes

2018 ◽  
Author(s):  
Nathan Seegert ◽  
Matthew Smith ◽  
Elena Patel ◽  
Jeffrey L. Coles
Keyword(s):  
Private Firms ◽  
Corporate Taxes

Real earnings management in public vs private firms in the GCC countries: a risk perspective

2017 ◽  
Vol 18 (2) ◽  
pp. 242-260 ◽  
Author(s):  
Khalid Al-Amri ◽  
Saif Al Shidi ◽  
Munther Al Busaidi ◽  
Serkan Akguc
Keyword(s):  
Earnings Management ◽  
Real Earnings Management ◽  
Private Firms ◽  
Flow Management ◽  
Public And Private ◽  
Content Type ◽  
Public Firms ◽  
Cash Flow Management ◽  
Gcc Countries ◽  
Private And Public

Purpose The purpose of this paper is to examine the use of real earnings management by private and public firms in a unique institutional setting, which is the Gulf Cooperation Council (GCC) countries. The paper also compares the level of real earnings management between public and private firms in the GCC area. Design/methodology/approach The GCC area is a unique setting to investigate the use of real earnings management because of the low enforcement of reporting standards and supervisory rules, lack of sophisticated financial analysis, specialized media tools and high concentration of capital ownership. The authors use different models of real earnings management proposed by Roychowdhury, 2006, cash flow management, productions cost management and discretionary expenses management to examine the use of real earnings management. Findings The paper documents evidence consistent with private and public firms using real earnings management to influence their earnings figures. The paper also shows that the level of real earnings management is higher for private firms compared to public firms when cash flow management and discretionary expenses management models are used. The production cost model results show evidence consistent with public firms only engaging in real earnings management through production cost reduction. Research limitations/implications The results of this study might not be applicable to other emerging markets. Practical implications The findings of this study should promote a general understanding of firms’ behavior in unique environment such as GCC countries. Regulators in the GCC region should be aware that real earnings management techniques have been used by firms and that extra caution is required when auditing or analyzing the financial information of private and public firms in the GCC market. Originality/value This paper contributes to the literature in many aspects. First, it provides additional evidence on the use of earnings management in unique market contexts outside the USA and Europe. The GCC markets share many common characteristics that make them interesting settings to be investigated. Second, this paper adds more evidence on the use of earnings management between public and private firms. In this regard, the paper adds additional evidence in the discussions proposed by Ball and Shivakumar (2005) and Givoly et al. (2010) who use two competing perspectives to investigate earnings quality in public and private firms: the demand hypothesis and the opportunistic behavior hypothesis.

Earnings management and performance of management buyouts

2019 ◽  
Vol 45 (10/11) ◽  
pp. 1363-1381
Author(s):  
Lokman Tutuncu
Keyword(s):  
Earnings Management ◽  
Private Equity ◽  
Discretionary Accruals ◽  
Private Firm ◽  
Private Firms ◽  
Cross Sectional ◽  
Content Type ◽  
Management Buyouts ◽  
Firm Management ◽  
And Performance

Purpose The purpose of this paper is to examine the effect of pre-acquisition earnings management on the performance of private firm management buyouts. Design/methodology/approach The study examines 291 UK private firms acquired by their managers between 2004 and 2012. Earnings management is investigated by means of cross-sectional discretionary accruals models, and estimated discretionary accruals are regressed on performance changes in the three years following acquisition. Findings Management buyouts of private firms are preceded by earnings overstatement and followed by performance deterioration. Private equity sponsored firms engage less in earnings management and remain more profitable than non-sponsored buyouts. Upward earnings managers cease to outperform industry after second post-buyout year, while aggressive earnings managers do not outperform industry at all. Discretionary total accruals are inversely associated with performance changes in the three years after buyout, and explain over 4 per cent of the changes in performance. Research limitations/implications Pertinent to the utilisation of private firms and their exemption from publishing cash flow statement, the study relies on accrual-based models for tests of earnings management. Originality/value The paper contributes to the mergers and acquisitions literature and value creation debate in buyouts by providing the first tests of earnings management and post-acquisition performance in private firm management buyouts.

scholarly journals A review of earnings management in private firms in response to tax rate changes

2017 ◽  
Vol 2017 (1) ◽  
pp. 151-161
Author(s):  
Dennis Sundvik
Keyword(s):  
Earnings Management ◽  
Future Research ◽  
Private Firms ◽  
Corporate Tax ◽  
Tax Reforms ◽  
Tax Rate ◽  
Listed Firms ◽  
Specific Focus ◽  
Practical Implications ◽  
Tax Accounting

Abstract In this paper, I present a review of tax accounting research with a specific focus on earnings management in response to changes in the corporate tax rate. While prior surveys of the tax accounting literature have a broad scope and focus primarily on publicly listed firms, I concentrate on studies examining private firms. These firms have stronger incentives to engage in tax-induced earnings management and recent evidence shows that firms in general defer earnings from high to low tax periods around tax reforms. I summarize contemporary studies, questions examined, and learnings. In addition, I discuss practical implications and outline future research possibilities.

Earnings Management and Audit in Private Firms

2019 ◽  
pp. 154-178
Author(s):  
Inna Sousa Paiva ◽  
Paulo Varela Dias
Keyword(s):  
Statistical Analysis ◽  
Earnings Management ◽  
Financial Statements ◽  
Private Firms ◽  
Minority Shareholders ◽  
Multivariate Statistical ◽  
Controlling Shareholders ◽  
Management Measures ◽  
Multiple Regression Technique ◽  
The Relationship

This chapter examines the relationship between the level of earnings management and the audit in private firms under the influence of financial crisis recuperation, using a sample of Ireland and Portuguese firms from 2008 to 2016. The authors use accruals methodology, namely four earnings management measures to capture earnings management in private firms. Multivariate statistical analysis was applied using the traditional multiple regression technique. Empirical results show that private firms with audited financial statements have powerful incentives to expropriate wealth from minority shareholders, pursuing their own interests at the expense of non-controlling shareholders. They also find that the private firms with audited financial statements in years under adjustment programs demonstrated lower level of earnings management. This study contributes to the accounting literature by providing empirical evidence for the effects of audit and earnings management in private firms in a financial recuperation context.

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