Comparative Study On Income Tax Cost Of Listed Companies’ Earnings Management Pre And Post Accounting Reform And Income Tax Reform In China

Accounting surplus as the important indicator of measuring a corporation’s performance influences the returns available for managers, and further influences the enthusiasm of managers’operating corporation. More accounting surplus sends a signal to outside that the corporation is formally operated, which helps the corporation to set up good image and enhance the confidence of investors. For a listed company, if accounting surplus indicator is not good, the company’s economic behavior such as issuance of shares, issuance of new shares, security card and delisting will be affected, eventually the company will meet financial crisis which is related to the survival of the company. Therefore, in order to gain and maintain good accounting surplus indicator, corporations usually conduct surplus management consciously. While managers increase profits by earnings management, the cost of income tax often occurs. Managers need a balance between the cost of financial report and the cost of tax to decide whether to use earnings management. Accounting reform in2007and income tax reform in2008have a deep influence on income tax of earnings management.This paper reviews the classic literatures and theories both at home and abroad in the past about the relationship between earnings management and income tax, the relationship between book-tax difference and earnings management and the influence of system reform on surplus management. On the basis of review, earnings management is divided into upward earnings management and downward earnings management through theory analysis. Upward earnings management behavior produces income tax cost and book-tax reform leads to changing of book-tax difference and name tax rate which is close to income tax cost, so we get the assumption that accounting reform and income tax reform have an influence on income tax cost of surplus management in China. Consequently, this paper adopts empirical analysis, regarding listed companies using upward surplus management in 2006-2008as object of study inspection and making a regression model in which income tax cost of surplus management is dependent variable and book-tax difference and tax rate is independent variable, to test the changing of income tax cost of earnings management caused by book-tax reform and its influence factors. We get the conclusions as follows:The accounting reform and income tax reform in China affected income tax cost of earning management. After accounting reform, income tax cost of earning management got higher because the new Accounting Standards expanded the space of earning management, but income tax reform led to the decline of income tax cost of surplus management because of the decline of tax rate, the expansion of book-tax difference and the reduction of earning management; accounting reform and income tax reform affected the book-tax difference, after accounting reform, book-tax difference expanded and it further expanded after income tax reform; book-tax difference is negative to income tax cost of earnings management, more book-tax difference and lower income tax cost of earnings management, which encourages managers to avoid income tax cost of earnings management by using book-tax difference; after income tax reform in2008, the general decline of name tax rate hadn’t weakened the relationship between tax rate and income tax cost of earnings management. The influence of book-tax reform on income tax cost of earnings management need to be studied in a greater scale of samples.