ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Relation of Tax Loss Carryforwards and Earnings Management through Real Activities

  • mi hee park Hongik University
  • YunBok-Yook Hongik University

Asian Tax Journal Vol. 12 No. 1 (2011), pp. 265-294

Abstract

This study investigates how tax carryforwards is associated with Real Earnings Management. The corporate tax low of Korean has the allowance for tax carryforwards system which can deduct loss from taxable income within the next 5 years when the tax carryforwards is occurred. The sample consists of non-banking firms(4,589 Firm-years)with December fiscal year listed in Korean Stock Exchange over 1999-2008. The data on tax carryforwards, corporate governance variables are collected from the DART of Financial Supervisory Service and other firm-specific data is collected from Kis-Value Ⅲ database. Roychowdhury (2006) finds evidence that firms use multiple real earnings management tools in order to meet certain financial reporting benchmarks to avoid reporting annual losses. Therefore, This study Roychowdhury (2006)' used a model. The empirical results are summarized as follows. First, this paper find that tax carryforwards exists firms more earnings management through real activities than other firms. These findings provide that the manager uses the tex carryforwards to reduce tax expense. Secondly, The results on the size of money among the company having tax loss carryforward has do not show the significant results. On third, the company having tax loss carryforward has positive results when they faces the carryforward deduction period within 1 to 2 years earnings management through real activities. The overall consequence on this study shows the executive positively use it because company with tax loss carryforward reduces the tax or does not take care of tax. More over, it means that various abnormal business activities happen to adjust higher accounting benefit on taxation. This research provides control authorities the political implication that there is company management profit balance inducement using taxation benefit in timing of raising the tax loss carryforward. Besides, it also contributes to financial accounts and taxation accounts on the point of systematical research to look the managing inducement for profit balance concerning with loss carryforward.

Keywords

  • Tax loss carrywards
  • real earnings management
  • abnormal discretionary expense
  • abnormal cash flow
  • abnormal production cost16)

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