Title: Earnings and balance-sheet properties and the interplay of tax incentives and tax enforcement

Authors: Thomas R. Loy

Addresses: University of Bremen, Max-von-Laue-Str. 1, D-28359 Bremen, Germany

Abstract: This paper analyses the joint association of tax incentives and tax law enforcement strictness on private firms' earnings and balance sheet properties. It answers a call for additional research on why "here is (…) substantial within-country variation in managers' incentives to [manage] earnings" [LaFond et al., (2007), p.14]. There is evidence that tax laws in practice are enacted to a different extent within a country's homogenous legal framework. The key results are that stricter tax law enforcement impairs managers' ability or willingness to engage in income-decreasing accrual earnings management. On the downside, managers instead seem to resort to real earnings management choices which are associated with potentially negative long-term real business impact but generally covered by the business judgement rule.

Keywords: financial reporting; tax incentives; tax enforcement.

DOI: 10.1504/IJEA.2021.118274

International Journal of Economics and Accounting, 2021 Vol.10 No.4, pp.421 - 449

Received: 02 Mar 2020
Accepted: 26 Oct 2020

Published online: 04 Aug 2021 *

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