ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

An Empirical Study on the Effect of Tax Rate Reduction and Financial Reporting Costs on Earnings Management

  • Son, Ke-Guen University of Seoul
  • Yoon, Sung-Man University of Seoul
  • Won Seok Choi University of Seoul

Asian Tax Journal Vol. 11 No. 3 (2010), pp. 261-286

Abstract

The tax authority is cutting corporate tax by reduction of tax－rate. In response of this policy,managers have an incentive to shift earnings to the fiscal year in low tax－rate in order to mitigate tax－burden. In this study we focuses FY2008 that is implemented tax－cut policy, the tax－rate reduction and the expansion of tax－base, announced at 26 December, 2008. So we predicted that managers decreased earnings of FY2008 to defer that to FY2009. In addition, managers with high cost of financial reporting confront the trade－off between tax costs and non－tax costs, and then they have an less incentive to defer earnings, respectively. This sample consists of 8,226 firm－year(FY2006, FY2007 and FY2008). As interest variables,we implemented DA(Dechow et al.(1995)), MIFZ(financial reporting cost) and interaction variable of above them. Results of OLS regression model are as follows. First, managers decrease discretionary accruals in the prior year that is enforced by tax－rate reduction policy. So this supports that managers have an incentive to manage earings in order to reduce tax－burden. Second, managers who have higher financial reporting costs increase discretionary accruals in that time regardless of tax－rate reduction. These evidences that corporate in financial distress consider just one side, increasing or meeting the target earnings. Finally, managers side with non－tax costs, financial reporting costs,in phenomenon of trade－off between tax and non－tax costs. These empirical evidences, the behavior of earings management in response of tax－cut, are expected to be of interest to the tax authority.

Keywords

  • tax rate reduction
  • earnings management
  • financial reporting costs
  • trade－off

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