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The Role of Taxes in Earnings Management: Evidence from Writedowns of Long-term Equity Investments

Author

Listed:
  • Giampaolo Arachi
  • Valeria Bucci

Abstract

This paper provides new empirical evidence on the role of taxes in discretionary asset writedowns. By focusing on a class of assets that has not been analyzed by prior research, namely long-term equity investments, and by exploiting exogenous changes in tax legislation in Italy, we are able to disentangle the influence of taxes on the decision to write down and on the magnitude of a writedown, conditional on taking the decision to write down. We find that taxes affect the timing of discretionary writedowns but not their magnitude. Consistently with this pattern, we also find that tax-driven opportunistic reporting does not significantly alter the effective tax burden of firms.

Suggested Citation

  • Giampaolo Arachi & Valeria Bucci, 2019. "The Role of Taxes in Earnings Management: Evidence from Writedowns of Long-term Equity Investments," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 75(3), pages 229-265.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2019-0003
    DOI: 10.1628/fa-2019-0003
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    Cited by:

    1. Bucci, Valeria, 2019. "The Effect of Fiscal Incentives on Business R&D," MPRA Paper 95333, University Library of Munich, Germany.

    More about this item

    Keywords

    corporate taxation; asset impairment; financial reporting; tax planning; writedowns of long-term equity investments; effective tax burden;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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