Income Tax Costs, Financial Reporting Costs And Earnings Management

Contractual frictions and asymmetric information in modern corporationsgive the motive and opportunity of earnings management to the enterpriseauthorities. Our country conducted the enterprise income tax reform in2008.On the background, relevant scholars had demonstrated that our listedcompanies did earnings management behavior to avoid income tax costs. Atthe same time, they had the tradeoff between the income tax costs and thefinancial reporting costs. Based on the relative stable environment of theenterprise income tax law after2008, the paper does research on the followingquestions: whether listed companies still have earnings management behaviorfor avoiding income tax costs, whether they have preference on the earningsmanagement methods, and whether they balance the income tax costs and thefinancial reporting costs.To study the questions above, the paper chooses A-share listedcompanies from2008to2012to investigate the companies’ earningsmanagement under the income tax costs and the financial reporting costs afterthe reform. Firstly, the study summarizes the relative theories and researches,then measures the degree of earnings management by reference to Kothari’sand Roychowdhury’s models, to determine whether the companies do managetheir earnings. Relying on company characteristics, the model is builtdescribing the relationship of income tax costs, financial reporting costs andearnings management. Finally, we can verify the questions we studyaccording to the results of the multiple regression.Within the conditions of relative stable environment of the enterpriseincome tax law, the results suggest that,(1) listed companies widely managetheir earnings in applying both accruals and real activities earningsmanagement strategies;(2) they take account for income tax costs, showingearnings management behaviour for tax avoidance, and the earnings range by real activities management is larger than that by accruals;(3) they balance theincome tax costs and financial reporting costs in both accruals and realactivities strategies, and the companies show the tradeoff among income taxcosts, political cost and capital market cost in accruals, while debt contractcost additional in real activities. What’s more, the companies take largerrange by real activities earnings management strategy than accruals on thetrade-off.The research would be beneficial to enrich the literature of earningsmanagement for avoiding tax costs after the reform in2008, and it alsoreveals listed companies’ objective earnings management behavior and itsfeatures in current.