ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Earnings Management for Acquisition and Disposition of Venture Firm Status

  • Hwa Deuk Yi

Asian Tax Journal Vol. 7 No. 3 (2006), pp. 53-77

Abstract

Venture firms are very important for the economic success of a nation. Korean government recognizes the significance of venture firms and supports founding and growing sound venture firms. The key ingredients of government supports are financial help and tax relief.Government allows 50% tax reduction for venture firms for three years. If a firm acquires venture firm status next year, its corporate tax burden for the next year will be reduced by 50%. Therefore, the firm has incentive to defer its current earnings to next year and be taxed at the reduced tax rates.On the other hand, when a firm looses venture firm status next year, its earnings will be taxed at the regular tax rates. Just before loosing venture firm status, the firm has incentive to report its earnings as much as possible this year and taxed at the reduced rates.This study examines whether firms manage earnings before newly acquiring or loosing venture firm status. Discretionary accruals are used to test earnings management and adjusted Jones model measures discretionary accruals.The sample consists of 530 firms which acquire newly venture firm status and 230 firms which loose venture firm status in the Kosdaq.The empirical results indicate that firms decrease discretionary accruals to depress earnings in the years before acquisition of venture firm status and firms increase discretionary accruals to save its corporate taxes before loosing venture firm status. These results are consistent with firms' incentives of earnings management.The results of this study may be helpful for government to set policies to support for venture firms and for academics and practitioner to analyze financial statements of venture firms.

Keywords

  • Venture Firm
  • Acquisition of Venture Firm Status
  • Tax reduction
  • Earnings Management
  • Discretionary Accruals
  • Adjusted Jones Model

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