Earnings and Balance-Sheet Properties and the Interplay of Tax Incentives and Tax Enforcement
33 Pages Posted: 26 Aug 2016 Last revised: 5 Mar 2020
Date Written: March 3, 2020
This paper analyzes 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 "there 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 supposedly 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 covered by the business judgment rule.
Keywords: Financial reporting, Tax incentives, tax enforcement
JEL Classification: M41, M48
Suggested Citation: Suggested Citation