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Political connections and tax-induced earnings management: evidence from China

Author

Listed:
  • Chen Li
  • Yaping Wang
  • Liansheng Wu
  • Jason Zezhong Xiao

Abstract

We use the occasion of a change in tax policy that raised the tax rate for many of the listed companies in China to examine tax-induced earnings management (TEM) from the perspective of political connections. We find that when the tax rate increased, only those affected firms with politically connected management engaged in TEM. This suggests that, in addition to motivation for managing earnings, capability of influencing tax authorities is also an important determinant of TEM. We also find that TEM helped the firms with politically connected management to reduce their tax burden.

Suggested Citation

  • Chen Li & Yaping Wang & Liansheng Wu & Jason Zezhong Xiao, 2016. "Political connections and tax-induced earnings management: evidence from China," The European Journal of Finance, Taylor & Francis Journals, vol. 22(4-6), pages 413-431, April.
    • Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:413-431
    DOI: 10.1080/1351847X.2012.753465
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    Cited by:

    1. Yuping Deng & Yanrui Wu & Helian Xu, 2020. "Political Connections and Firm Pollution Behaviour: An Empirical Study," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(4), pages 867-898, April.
    2. Chengpeng Zhu & Muhammad Husnain & Saif Ullah & Muhammad Tasnim Khan & Waris Ali, 2022. "Gender Diversity and Firms’ Sustainable Performance: Moderating Role of CEO Duality in Emerging Equity Market," Sustainability, MDPI, vol. 14(12), pages 1-26, June.
    3. Mohammad Abedalrahman Alhmood & Hasnah Shaari & Redhwan Al-dhamari, 2020. "CEO Characteristics and Real Earnings Management in Jordan," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(4), pages 255-266, July.
    4. Zhi Wang & Geert Braam & Daniel Reimsbach & Jiaxin Wang, 2020. "Political embeddedness and firms’ choices of earnings management strategies in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(5), pages 4723-4755, December.
    5. Majeed, Muhammad Ansar & Yan, Chao & Zhong, Huijie, 2022. "Do firms manipulate earnings after winning public-private partnership bids? Evidence from China," Emerging Markets Review, Elsevier, vol. 51(PB).
    6. repec:zbw:bofitp:2019_004 is not listed on IDEAS
    7. Deng, Yuping & Wu, Yanrui & Xu, Helian, 2019. "Political connections and firm pollution behaviour: An empirical study," BOFIT Discussion Papers 4/2019, Bank of Finland Institute for Emerging Economies (BOFIT).
    8. Tariq H. Ismail & Mohamed El-Deeb & Yasser Tawfik Halim, 2022. "Do related party transactions affect the relationship between political connections and firm value? Evidence from Egypt," Future Business Journal, Springer, vol. 8(1), pages 1-12, December.
    9. Paulo Jorge Varela Lopes Dias & Pedro Miguel Gomes Reis, 2018. "The relationship between the effective tax rate and the nominal rate," Contaduría y Administración, Accounting and Management, vol. 63(2), pages 23-24, Junio.
    10. Proença, Catarina & Augusto, Mário & Murteira, José, 2023. "The effect of earnings management on bank efficiency: Evidence from ECB-supervised banks," Finance Research Letters, Elsevier, vol. 51(C).
    11. Muhammad Sadiq & Zaleha Othman & Ooi Chee Keong, 2019. "A Study of Interaction Effects of Political Influences and Earnings Management on Organisational Performance," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(5), pages 642-654, May.
    12. Muhammad Shaique & Fei Guo & Ruqia Shaikh & Shahbaz Khan & Muhammad Usman, 2017. "Role of Social Relations of Outside Directors with CEO in Earnings Management," IJFS, MDPI, vol. 5(4), pages 1-14, December.
    13. Yuping Deng & Yanrui Wu & Helian Xu, 2020. "Political Connections and Firm Pollution Behaviour: An Empirical Study," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(4), pages 867-898, April.
    14. Wen, Wen & Cui, Huijie & Ke, Yun, 2020. "Directors with foreign experience and corporate tax avoidance," Journal of Corporate Finance, Elsevier, vol. 62(C).
    15. Pan, Jianping & Weng, Ruoyu & Yin, Sirui & Fu, Xiaoqing (Maggie), 2022. "Central supervision and earnings management: Quasi-experimental evidence from China," The British Accounting Review, Elsevier, vol. 54(3).
    16. Catarina Proença & Mário Augusto & José Murteira, 2023. "Political connections and remuneration of bank boards’ members: moderating effect of gender diversity," Review of Managerial Science, Springer, vol. 17(8), pages 2727-2767, November.

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