Tax Effects of Book-Tax Conformity, Financial Reporting Incentives, and Firm Size

2013 ◽  
Vol 12 (2) ◽  
pp. 1-25 ◽  
Author(s):  
K. Hung Chan ◽  
Kenny Z. Lin ◽  
Feng Tang
Keyword(s):  
Financial Reporting ◽  
Small Firms ◽  
Reporting Quality ◽  
Unintended Consequences ◽  
Data Availability ◽  
Policy Position ◽  
Cross Sectional ◽  
Tax Effects ◽  
Reporting Incentives ◽  
The Government

ABSTRACT This study employs a natural experiment to examine the tax effects of a change in the level of conformity between tax and financial reporting in China for firms with different financial reporting incentives. We find that in a full book-tax conformity system, firms with incentives to report higher book income pay significantly higher income tax (per dollar of sales) than do firms without the same incentives. Although we do not find similar evidence in a non-conformed system, we observe cross-sectional variation in taxes paid by firms of varying sizes: by exploiting non-conforming financial reporting rules to a greater extent, large firms pay proportionately lower taxes than do small firms. To improve financial reporting quality, many countries have adopted International Financial Reporting Standards (IFRS) that may affect book-tax reporting differences. Our results suggest that this policy alternative is less desirable from a tax perspective. Therefore, accounting standard setters and securities regulators around the world should consider not only how such a change is intended to benefit capital markets, but also what unintended consequences this policy choice might have for government revenue. Our results also strengthen the government policy position on giving more tax relief to small firms. Data Availability: All data are available from public sources.

Proactive Financial Reporting Enforcement: Audit Fees and Financial Reporting Quality Effects

2019 ◽  
Vol 95 (2) ◽  
pp. 167-197 ◽  
Author(s):  
Annita Florou ◽  
Serena Morricone ◽  
Peter F. Pope
Keyword(s):  
Financial Reporting ◽  
Financial Distress ◽  
Reporting Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Financial Reporting Quality ◽  
Costs And Benefits ◽  
Cross Sectional ◽  
The Public ◽  
Sectional Analysis

ABSTRACT We examine the costs and benefits of proactive financial reporting enforcement by the U.K. Financial Reporting Review Panel. Enforcement scrutiny is selective and varies by sector and over time, yet can be anticipated by auditors and companies. We find evidence that increased enforcement intensity leads to temporary increases in audit fees and more conservative accruals. However, cross-sectional analysis across market segments reveals that audit fees increase primarily in the less-regulated AIM segment, and especially those AIM companies with a higher likelihood of financial distress and less stringent governance. On the contrary, less reliable operating asset-related accruals are more conservative in the Main segment and, in particular, those Main companies with stronger incentives for higher financial reporting quality. Overall, our study indicates that financial reporting enforcement generates costs and benefits, but not always for the same companies. JEL Classifications: K42; M41; M42; M48. Data Availability: Data are available from the public sources cited in the text.

Retroactive Tax Legislation, Reported Earnings, and Investors' Responses to Earnings “Surprises”: Evidence from R&D Credit Extensions

2016 ◽  
Vol 38 (2) ◽  
pp. 87-109 ◽  
Author(s):  
Brian Bratten ◽  
David S. Hulse
Keyword(s):  
Financial Reporting ◽  
Stock Prices ◽  
Unintended Consequences ◽  
Data Availability ◽  
Substantial Part ◽  
Tax Rates ◽  
Financial Reporting Standards ◽  
Average Decrease ◽  
Tax Legislation ◽  
Reported Earnings

ABSTRACT When Congress retroactively extends a temporary tax rule, the effect on earnings is complex because financial reporting standards require firms to apply the integral method using enacted tax law to determine quarterly income tax expense. We model this effect and examine earnings announcements following retroactive extensions of the federal R&D tax credit to test how investors incorporate the effect into stock prices. We find that investors respond when earnings are announced, even though the effect could have been determined several weeks earlier. We also show that in recent years, the effects of retroactive extensions of the credit are a substantial part of the average decrease in effective tax rates (ETRs) from the third to fourth quarter for calendar-year firms. Our results have implications for investors and researchers examining earnings and ETRs around retroactive extensions of temporary tax rules and suggest that congressional delays and GAAP interact to produce unintended consequences. JEL Classifications: M41; M48; G14; H25. Data Availability: Data used in this study are available from the sources identified in the text.

scholarly journals Users’ Perception of Financial Reporting Quality in Ghana

2019 ◽  
Vol 8 (3) ◽  
pp. 187
Author(s):  
Joseph Mbawuni
Keyword(s):  
Financial Reporting ◽  
Middle Management ◽  
Reporting Quality ◽  
Middle Level ◽  
Sub Saharan Africa ◽  
Cross Sectional Survey ◽  
Cross Sectional ◽  
Financial Reports ◽  
Sub Saharan ◽  
Five Dimension

This paper assesses the extent to which top and middle management perceive FRQ of companies in Ghana after the adoption of International Financial Reporting Standards (IFRS). Drawing from the literature, a five-dimension FRQ questionnaire was developed for the study. It was a cross-sectional survey that involved a sample of 500 respondents from top and middle level management across seven industries in Ghana. The findings indicate that, generally top and middle management perceive the qualitative characteristics of FRQ of the Ghanaian companies to be very good. However, Timeliness of FRQ in terms of publishing audited financial reports was the only poorly rated qualitative characteristic. Implications to accounting theory and practitioners are discussed. Moreover, there were differences in respondents’ perception of FRQ according to their work background characteristics. It was found that top and middle management who were professional accountants were more critical in their assessment and therefore rated their perceived FRQ significantly lower than those who were non-accounting professionals.  This study contributes to filling the void in FRQ literature regarding accounting information users’ assessment of FRQ in IFRS-compliant countries in Sub-Saharan Africa.

scholarly journals Internal Governance and Real Earnings Management

2015 ◽  
Vol 91 (4) ◽  
pp. 1051-1085 ◽  
Author(s):  
Qiang Cheng ◽  
Jimmy Lee ◽  
Terry Shevlin
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Team Work ◽  
Real Earnings Management ◽  
Cross Sectional ◽  
Internal Governance ◽  
Checks And Balances ◽  
Earnings Benchmarks ◽  
Alternative Measures

ABSTRACT We examine whether internal governance affects the extent of real earnings management in U.S. corporations. Internal governance refers to the process through which key subordinate executives provide checks and balances in the organization and affect corporate decisions. Using the number of years to retirement to capture key subordinate executives' horizon incentives and using their compensation relative to CEO compensation to capture their influence within the firm, we find that the extent of real earnings management decreases with key subordinate executives' horizon and influence. The results are robust to alternative measures of internal governance and to various approaches used to address potential endogeneity, including a difference-in-differences approach. In cross-sectional analyses, we find that the effect of internal governance is stronger for firms with more complex operations where key subordinate executives' contribution is higher, is enhanced when CEOs are less powerful, is weaker when the capital markets benefit of meeting or beating earnings benchmarks is higher, and is stronger in the post-SOX period. This paper contributes to the literature by examining how internal governance affects the extent of real earnings management and by shedding light on how the members of the management team work together in shaping financial reporting quality. JEL Classifications: G32; M40.

Audit quality and earnings management: evidence from Jordan

2016 ◽  
Vol 17 (2) ◽  
pp. 170-189 ◽  
Author(s):  
Ebraheem Saleem Salem Alzoubi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Least Square ◽  
Cross Sectional ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Jones Model

Purpose – The purpose of this paper is to test the association between audit quality and earnings management (EM). Audit quality studies documented that accruals would reduce when the auditor is independent or the audit firm is large. Design/methodology/approach – This paper uses generalised least square regression to investigate the influence of audit quality on EM. The sample contained 86 companies listed on the Amman Stock Exchange from 2007 to 2010. The cross-sectional modified Jones model was employed to measure discretionary accruals as a proxy for EM. Findings – This paper revealed that there is a significantly negative association between audit quality and EM. The result inferred that EM level is significantly lower among companies using the services of independent auditors. Moreover, this study exposed that the level of EM is significantly less among companies hiring a Big 4 audit firm, as compared to companies utilising the service of a non-Big 4 audit firm. Research limitations/implications – The measurement error, which is a rigorous concern for studies on EM, is one of the limitations in this study. Hence, the current study wholly inherited the limits of the modified Jones model. Practical implications – The findings based on the current study would provide beneficial information for regulators in Jordan and other countries with an institutional environment similar to that of Jordan. Moreover, the results provided valuable information to investors in assessing the influence of audit quality on financial reporting quality (FRQ). Originality/value – The current study contributed to auditing and corporate governance literature and its influence on EM among Jordanian companies. This research will be of value to companies seeking to reduce EM and enhance FRQ.

The Impact of Mandatory IFRS Adoption on Audit Fees: Theory and Evidence

2012 ◽  
Vol 87 (6) ◽  
pp. 2061-2094 ◽  
Author(s):  
Jeong-Bon Kim ◽  
Xiaohong Liu ◽  
Liu Zheng
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Financial Reporting Quality ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Audit Fee ◽  
European Union Countries ◽  
The Impact

ABSTRACT: This study examines the impact of International Financial Reporting Standards (IFRS) adoption on audit fees. We first build an analytical audit fee model to analyze the impact on audit fees for the change in both audit complexity and financial reporting quality brought about by IFRS adoption. We then test the model's predictions using audit fee data from European Union countries that mandated IFRS adoption in 2005. We find that mandatory IFRS adoption has led to an increase in audit fees. We also find that the IFRS-related audit fee premium increases with the increase in audit complexity brought about by IFRS adoption, and decreases with the improvement in financial reporting quality arising from IFRS adoption. Finally, we find some evidence that the IFRS-related audit fee premium is lower in countries with stronger legal regimes. Our results are robust to a variety of sensitivity checks. Data availability: Data are available from public sources identified in the paper.

Mandatory IFRS Adoption and Institutional Investment Decisions

2012 ◽  
Vol 87 (6) ◽  
pp. 1993-2025 ◽  
Author(s):  
Annita Florou ◽  
Peter F. Pope
Keyword(s):  
Financial Reporting ◽  
Data Availability ◽  
Market Outcomes ◽  
Institutional Investment ◽  
Financial Reporting Standards ◽  
Institutional Holdings ◽  
Reporting Incentives ◽  
Annual Reporting ◽  
Commercial Sources ◽  
First Time

ABSTRACT We examine whether the mandatory introduction of International Financial Reporting Standards leads to an increase in institutional investor demand for equities. Using a large ownership database covering all types of institutional investors from around the world, we find that institutional holdings increase for mandatory IFRS adopters. Changes in holdings are concentrated around first-time annual reporting events. Second, we document that the positive IFRS effects on institutional holdings are concentrated among investors whose orientation and styles suggest they are most likely to benefit from higher quality financial statements, including active, value, and growth investors. These results are consistent with holdings changes being associated with the financial reporting regime change. Finally, we show that increased institutional holdings are concentrated in countries in which enforcement and reporting incentives are strongest, and where the differences between local GAAP and IFRS are relatively high. Overall, our study helps shed new light on the channels by which IFRS information becomes impounded in market outcomes. JEL Classifications: G11; K22; M41; M42. Data Availability: The data used in this study are available from the commercial sources identified in the paper.

scholarly journals PANEL DATA REGRESSION ANALYSIS FOR FACTORS AFFECTING INFANT MORTALITY RATE IN EAST JAVA 2013-2017

2021 ◽  
Vol 16 (3) ◽  
pp. 437
Author(s):  
Faishal Azhar Wardhana ◽  
Rachmah Indawati
Keyword(s):  
Panel Data ◽  
Mortality Rate ◽  
Infant Mortality ◽  
Data Availability ◽  
Infant Mortality Rate ◽  
Complete Coverage ◽  
Cross Sectional ◽  
Panel Data Regression ◽  
Data Regression ◽  
The Government

ABSTRACTThe escalating infant mortality rate (IMR) in Indonesia has not been able to fulfill the target of Sustainable Development Goals (SDGs) that restrict the limit of IMR to just 12 of 1,000 live births. According to such fact, this research was designed as the application of panel data regression in an IMR case study of East Java from 2013–2017. Regression panel data enable research in describing cross-sectional and time series information. The variety of data availability in this method were capable of producing a high degree of freedom, allowing it to meet the prerequisites and statistical properties. This method was considered the most suitable one for analyzing the rising IMR. This research was classified as non-reactive research. All regencies/cities in East Java served as this study’s population. Data collection included K4 coverage, childbirth assistance, and KN complete coverage. The result of panel data regression showed a significant connection between K4 coverage (0.0230), childbirth assistance (p = 0.0105), and KN complete coverage (0.0205). Adjusted R-Square value was obtained with an amount of 80%, which means that all independent variables were able to explain the dependent one of that value, while the remaining were explained by other factors. This study can provide some suggestions to support IMR in East Java, including handling from the government or related pregnant families to support IMR on an ongoing basis. Keywords: panel data regression, IMR, K4, childbirth assistance, KN complete

scholarly journals The Effect of Tax Authority Monitoring and Enforcement on Financial Reporting Quality

2014 ◽  
Vol 36 (2) ◽  
pp. 137-170 ◽  
Author(s):  
Michelle Hanlon ◽  
Jeffrey L. Hoopes ◽  
Nemit Shroff
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Positive Association ◽  
Financial Reporting Quality ◽  
Tax Enforcement ◽  
Country Level ◽  
Corporate Insiders ◽  
Monitoring And Enforcement ◽  
The Government ◽  
Almost All

ABSTRACT: This paper examines the relation between tax enforcement and financial reporting quality. The government, due to its tax claim on firm profits, is de facto the largest minority shareholder in almost all corporations. Therefore, the government, like other shareholders, has an interest in the accurate reporting of (taxable) income and preventing insiders from siphoning corporate funds to obtain private benefits. We hypothesize and find evidence that higher tax enforcement by the tax authority has a positive association with financial reporting quality. Further, we find that this association is generally stronger when other monitoring mechanisms are weaker. Our evidence is consistent with the predictions from the Desai, Dyck, and Zingales (2007) theory that the tax authority provides a monitoring mechanism of corporate insiders. Our paper also adds to the literature on the determinants of financial reporting quality and how the relation between accounting standards and reporting outcomes depends on country-level institutions. JEL Classifications: G3, H25, H26, K34, M40.

The Role of Financial Reporting Quality in Mitigating the Constraining Effect of Dividend Policy on Investment Decisions

2013 ◽  
Vol 88 (3) ◽  
pp. 1007-1039 ◽  
Author(s):  
Santhosh Ramalingegowda ◽  
Chuan-San Wang ◽  
Yong Yu
Keyword(s):  
Financial Reporting ◽  
Firm Value ◽  
Dividend Policy ◽  
Investment Decisions ◽  
Reporting Quality ◽  
Data Availability ◽  
Financial Reporting Quality ◽  
High Quality ◽  
Investment Projects

ABSTRACT Miller and Modigliani's (1961) dividend irrelevance theorem predicts that in perfect capital markets dividend policy should not affect investment decisions. Yet in imperfect markets, external funding constraints that stem from information asymmetry can force firms to forgo valuable investment projects in order to pay dividends. We find that high-quality financial reporting significantly mitigates the negative effect of dividends on investments, especially on R&D investments. Further, this mitigating role of financial reporting quality is particularly important among firms with a larger portion of firm value attributable to growth options. In addition, we show that the mitigating role of high-quality financial reporting is more pronounced among firms that have decreased dividends than among firms that have increased dividends. These results highlight the important role of financial reporting quality in mitigating the conflict between firms' investment and dividend decisions and thereby reducing the likelihood that firms forgo valuable investment projects in order to pay dividends. Data Availability: Data are available from public sources identified in the paper.

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