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Business groups, taxes and accruals management

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Author Info
Beuselinck Ch.
Deloof M.

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Abstract

This paper provides evidence that Belgian firms belonging to a business group have a lower effective tax rate (ETR) and face a less positive association between pre-tax income and ETRs than independent firms. These findings suggest that individual group members apply efficient tax planning techniques in order to minimize taxes at the group level. We hypothesize that group firms strategically adjust firm-level reported earnings levels in response to tax incentives. We find evidence consistent with this hypothesis, in that the intrinsic negative association between total accruals and operating cash flows is more (less) pronounced for group firms facing a positive (zero) marginal tax rate status, compared to independent firms. In addition, we find that a group firm’s net tax-paying situation is more important in its discretionary accruals reporting decisions, compared to independent firms. Finally, we identify intra-group receivables as relevant tax-reducing accruals components. Results are robust to alternative model specifications, variable definitions and measures.

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Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2006015.

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Length: 45 pages
Date of creation: Jul 2006
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Handle: RePEc:ant:wpaper:2006015

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  2. Dechow, Patricia M. & Kothari, S. P. & L. Watts, Ross, 1998. "The relation between earnings and cash flows," Journal of Accounting and Economics, Elsevier, vol. 25(2), pages 133-168, May. [Downloadable!] (restricted)
  3. Buysschaert A. & Deloof M. & Jegers M., 2005. "Is group affiliation profitable in developed countries? Not in Belgium," Working Papers 2005014, University of Antwerp, Faculty of Applied Economics. [Downloadable!]
  4. Plesko, George A., 2003. "An evaluation of alternative measures of corporate tax rates," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 201-226, June. [Downloadable!] (restricted)
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  6. Gramlich, J.D.Jeffrey D. & Limpaphayom, Piman & Ghon Rhee, S., 2004. "Taxes, keiretsu affiliation, and income shifting," Journal of Accounting and Economics, Elsevier, vol. 37(2), pages 203-228, June. [Downloadable!] (restricted)
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  9. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August. [Downloadable!] (restricted)
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  10. Shackelford, Douglas A. & Shevlin, Terry, 2001. "Empirical tax research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 321-387, September. [Downloadable!] (restricted)
  11. Vander Bauwhede, Heidi & Willekens, Marleen & Gaeremynck, Ann, 2003. "Audit firm size, public ownership, and firms' discretionary accruals management," The International Journal of Accounting, Elsevier, vol. 38(1), pages 1-22. [Downloadable!] (restricted)
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  15. Gupta, Sanjay & Newberry, Kaye, 1997. "Determinants of the variability in corporate effective tax rates: Evidence from longitudinal data," Journal of Accounting and Public Policy, Elsevier, vol. 16(1), pages 1-34. [Downloadable!] (restricted)
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