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Earnings Management in Response to Corporate Tax Rate Reduction Under an Imputation Tax System

Author

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  • Nan-Ting Kuo

    (Nankai Business School, Nankai University, 94 Weijin Road, Tianjin 300071, P. R. China)

  • Cheng-Few Lee

    (Rutgers Business School, Rutgers University, Piscataway, New Jersey 08854-8054, USA)

Abstract

Our study explores how firms respond to a tax rate reduction under an imputation tax system. By exploring Taiwanese data, we find that firms engage in significant downward earnings management preceding a tax rate reduction, and this earnings management behavior reverses in the following year. We further explore what factors drive this finding, given that corporate tax avoidance reduces shareholder imputation credits and thus generates limited tax benefits to most shareholders. We argue and find evidence that three factors explain the tax-induced earnings management: (1) financing benefits from tax savings, (2) managerial rent extraction, and (3) the influence of foreign and domestic institutional shareholders. Our results suggest that factors other than shareholder tax benefits have significant effects on corporate tax avoidance, suggesting that firms still have strong incentives to avoid taxes under an imputation tax system.

Suggested Citation

  • Nan-Ting Kuo & Cheng-Few Lee, 2019. "Earnings Management in Response to Corporate Tax Rate Reduction Under an Imputation Tax System," The International Journal of Accounting (TIJA), World Scientific Publishing Co. Pte. Ltd., vol. 54(01), pages 1-34, March.
    • Handle: RePEc:wsi:tijaxx:v:54:y:2019:i:02:n:s1094406019500021
    DOI: 10.1142/S1094406019500021
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