Authors: Dennis Sundvik
Addresses: Department of Accounting and Commercial Law, Hanken School of Economics, P.O. Box 287, Biblioteksgatan 16, 65101 Vasa, Finland
Abstract: Prior literature considers a change in the national corporate income tax (CIT) rate as a strong firm incentive to manage earnings. This article examines the link between two recent CIT reforms in Sweden and earnings management with a large dataset of private firms. The effects of tax rate cuts are estimated on aggregate measures as well as on decomposed measures of accrual-based earnings management. The results suggest that taxation clearly influences these firms in their high book-tax conformity setting. Downward earnings management is documented before the reduction in the CIT rate, consistent with research on public firms with lower book-tax conformity. Primarily accounts receivable is noted to drive these results. Weaker evidence is provided with the inventory and depreciation accrual vehicles. The tax effects are statistically and economically significant. Furthermore, the income-decreasing behaviour prior to the CIT reforms is observed to be persistent over time.
Keywords: book-tax conformity; earnings management; corporate income tax; CIT; discretionary accruals; financial accounting; private firms; specific accruals; Sweden; tax accounting incentives; tax reform; corporate taxation; tax cuts; tax rates.
International Journal of Accounting, Auditing and Performance Evaluation, 2016 Vol.12 No.3, pp.261 - 286
Received: 26 Nov 2014
Accepted: 03 Aug 2015
Published online: 21 Jul 2016 *