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.
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
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