Tax Reporting Aggressiveness, Financial Reporting Aggressiveness, and Multinational Corporate Development -- Evidence from Japan

Abstract

The purpose of this paper is to investigate the information content in the difference between in-come reported to shareholders and income reported to tax authorities (hereinafter, the BTD), and the interaction between tax aggressiveness and financial reporting aggressiveness. Through my investigation, I explore how the tax planning and tax strategy affect on the management and corporate strategy for multinational development of Japanese companies, assuming that these Japanese companies make use of such a tax shelter scheme and utilize the scheme to manage an earning. This study makes several contributions to research in financial accounting, tax accounting and finance. First, I find that the growing BTD is mainly caused by earnings management by corporate managers using Japanese data. Second, I develop an enhanced measure of tax reporting aggressiveness sup-ported from prior studies. Third, I document that financial reporting aggressiveness and tax reporting aggressiveness are negatively related to each other, as well as to other corporate policies. Moreover, this evidence suggests that Japanese firms have fewer rooms for widening the BTD if they endeavor to make more avoidance for tax payment. This result is inconsistent with prior studies based on the evidence of U.S., such as Frank, et al. (2009). Lastly, this research suggests that tax reporting aggressiveness of Japanese firms has got involved with their advance into overseas market, which should be of interest to current and potential corporate investors.

Keywords: tax aggressiveness, earnings management, tax shelter, permanent difference, multinational development, definite-settlement-of-accounts standard

JEL Classification: M40, H26, G34