Earnings Management and Deferred Tax

37 Pages Posted: 6 Nov 2002

See all articles by Kevin Holland

Kevin Holland

Cardiff Business School

Richard H.G. Jackson

University of Bath - School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: August 2002

Abstract

This study analyses the deferred tax provisions of firms during a period in which the firms' incentive to manage earnings may have been be particularly strong; and in which firms made disclosures in relation to partial deferred tax provisions which revealed readily their under- or over-provision of deferred tax. Using a sample of 58 firms for the two years 1991 and 1992, the magnitude of the under- or over-provisions found is economically significant, amounting, on average, to around 20% of the maximum potential deferred tax liability and, more importantly, 9% of profit or loss before tax. This paper takes such under/over-provision of deferred tax and investigates its relationship with a number of posited explanatory variables - as derived and developed from the earnings management literature. In a multivariate setting it is found that the level of under-/over-provision is related to the following characteristics: whether the firm is reporting a pre-tax loss or a pre-tax profit; the extent of adjustment to prior year tax; and the level of surplus advance corporation tax (ACT). These findings support a general profit-smoothing hypothesis, and the finding in relation to ACT suggests that firms take an overall view in determining the required level of provision in order to manage earnings, rather than concentrating upon particular line items. There is also weaker evidence of a relationship between the level of under-/over-provision and firms' levels of gearing and effective tax rates.

Keywords: earnings management, deferred tax, tax accounting

JEL Classification: M41, M43, H25

Suggested Citation

Holland, Kevin M. and Jackson, Richard H.G., Earnings Management and Deferred Tax (August 2002). Available at SSRN: https://ssrn.com/abstract=327220 or http://dx.doi.org/10.2139/ssrn.327220

Kevin M. Holland (Contact Author)

Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Richard H.G. Jackson

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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