Title

The impact of tax holidays on earnings management : an empirical study of corporate reporting behavior in a developing-economy framework

Document Type

Journal article

Source Publication

The International Journal of Accounting

Publication Date

2006

Volume

41

Issue

2

First Page

163

Last Page

175

Keywords

Discretionary accruals; Earnings management; Foreign investment enterprises (FIEs); Income shifting; Tax holidays

Abstract

This study investigates whether foreign investment enterprises (FIEs) in China alter their corporate reporting behavior in response to a known schedule of tax-rate increases. The context of this investigation is a tax-incentive scheme that allows firms to pay taxes at a reduced rate for a limited period of time, and then at a higher rate when this period expires. If managers attempt to maximize firm value by minimizing tax costs, then the spread of tax rates in the periods surrounding the rate change may provide a substantial incentive for them to accelerate revenue and defer expenses. Consistent with this hypothesis, the empirical results indicate that firms report significantly higher discretionary current accruals for the years before tax-rate increases. The evidence, which indicates that firms manage earnings upward to take advantage of lower tax rates that are available in certain years, has important implications for tax policymakers.

DOI

10.1016/j.intacc.2006.04.006

Print ISSN

10944060

E-ISSN

22133933

Publisher Statement

Copyright © 2006 University of Illinois. All rights reserved.

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Recommended Citation

Lin, K. Z. (2006). The impact of tax holidays on earnings management: An empirical study of corporate reporting behavior in a developing-economy framework. The International Journal of Accounting, 41(2), 163-175. doi: 10.1016/j.intacc.2006.04.006