Tax-Induced Earnings Management within a Dividend Imputation System

Australian Tax Forum, Forthcoming

36 Pages Posted: 12 Jun 2013 Last revised: 6 Jul 2013

See all articles by Balasingham Balachandran

Balasingham Balachandran

La Trobe University - School of Economics and Finance; Financial Research Network (FIRN)

Dean Hanlon

Monash University - Department of Accounting

Hanghang (Candie) Tu

Independent

Date Written: July 7, 2013

Abstract

This study examines whether, under a full dividend imputation system, companies defer income until tax changes beneficial to shareholders take effect. Using a sample of Australian listed companies, we find that companies manage earnings downwards via discretionary current accruals in the year preceding a reduction in personal income tax rates, and in the year preceding a change in the tax status of superannuation funds, which reverse the first year both changes operate in unison. We also examine whether such earnings management is a function of a company’s ownership structure and dividend payout policy. We find a company’s earnings management varies according to the proportion of shares held by superannuation funds, consistent with superannuation funds, as an investor-type, benefiting most from income deferral. We also find income deferral is more likely for dividend-paying firms, consistent with the deferral of dividends and the deferral of income being alternative ways to exploit shareholder-level tax changes to enhance shareholder wealth. Our results are informative of the likely behavior of companies should recent recommendations for reduced personal tax rates be implemented.

Keywords: Earnings management, Shareholder-level tax changes, Full dividend imputation system, Ownership structure, Dividend payout policy

JEL Classification: G14, H25, K34, M41

Suggested Citation

Balachandran, Balasingham and Hanlon, Dean and Tu, Hanghang (Candie), Tax-Induced Earnings Management within a Dividend Imputation System (July 7, 2013). Australian Tax Forum, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2277197 or http://dx.doi.org/10.2139/ssrn.2277197

Balasingham Balachandran (Contact Author)

La Trobe University - School of Economics and Finance ( email )

La Trobe University
Bundoora, Vic, 3086
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Dean Hanlon

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Hanghang (Candie) Tu

Independent ( email )

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