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Earnings cosmetics in a tax-driven accounting environment: evidence from Finnish public firms

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  • Jyrki Niskanen
  • Matti Keloharju

Abstract

Finnish firms are known to manage earnings downwards to avoid income taxes. This study suggests that they simultaneously manage earnings upwards in a smaller scale. The idea behind this behaviour is that humans may perceive a profit of, say, 301 million as abnormally larger than a profit of 298 million. Consequently, firms tend to adjust the second leftmost digit of earnings to exceed nine in order to make the first digit of earnings larger by one. Such corporate behaviour has been previously documented in New Zealand and in the USA. Our study finds a similar phenomenon in Finland. Our results show that although the largest second digits (eight and nine) are fewer than expected, only sixes and sevens are statistically significantly managed upwards.

Suggested Citation

  • Jyrki Niskanen & Matti Keloharju, 2000. "Earnings cosmetics in a tax-driven accounting environment: evidence from Finnish public firms," European Accounting Review, Taylor & Francis Journals, vol. 9(3), pages 443-452.
  • Handle: RePEc:taf:euract:v:9:y:2000:i:3:p:443-452
    DOI: 10.1080/09638180020017159
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    References listed on IDEAS

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    1. Ivo Welch & Siew Hong Teoh & T.J. Wong, 1995. "Earnings Management and The Post-Issue Underperformance in Seasoned Equity Offerings," Finance 9-95., University of California at Los Angeles.
    2. Kinnunen, Juha & Keloharju, Matti & Kasanen, Eero & Niskanen, Jyrki, 2000. "Earnings management and expected dividend increases around seasoned share issues: evidence from Finland," Scandinavian Journal of Management, Elsevier, vol. 16(2), pages 209-228, June.
    3. Marko Jarvenpaa, 1996. "The relationship between taxation and financial accounting in Finland," European Accounting Review, Taylor & Francis Journals, vol. 5(1), pages 899-914.
    4. DeFond, Mark L. & Jiambalvo, James, 1994. "Debt covenant violation and manipulation of accruals," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 145-176, January.
    5. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
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    Citations

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    Cited by:

    1. Yves Mard, 2005. "Vers Une Information Comptable Plus Transparente : L'Apport Des Recherches Portant Sur La Gestion Des Résultats Comptables," Post-Print halshs-00581229, HAL.
    2. Steijvers, Tensie & Niskanen, Mervi, 2014. "Tax aggressiveness in private family firms: An agency perspective," Journal of Family Business Strategy, Elsevier, vol. 5(4), pages 347-357.
    3. Bonache, Adrien & Moris, Karen & Maurice, Jonathan, 2009. "Risque associé à l'utilisation de la loi de Benford pour détecter les fraudes dans le secteur de la mode
      [Risk of Reviews based on Benford Law in the Fashion Sector]
      ," MPRA Paper 15352, University Library of Munich, Germany.
    4. Dominique Geyer & Christoph Drechsler, 2014. "Detecting Cosmetic Debt Management Using Benford's Law," Post-Print hal-01059758, HAL.
    5. Sandeep Goel, 2014. "Creating Accounting Numbers Using Designed Choices: A Case Study of Indian Hotel Industry," Accounting and Finance, Institute of Accounting and Finance, issue 3, pages 29-35, September.
    6. repec:eee:jiaata:v:30:y:2018:i:c:p:2-17 is not listed on IDEAS
    7. Bonache, Adrien & Moris, Karen, 2009. "Nonlinear and chaotic patterns in Japanese video game console sales and consequences for management control," MPRA Paper 18196, University Library of Munich, Germany.
    8. Yves Mard, 2003. "Performance Comptable Et Gestion Des Resultats," Post-Print halshs-00582798, HAL.

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