Political Connections and Tax-Induced Earnings Management: Evidence from China

European Journal of Finance, 2016, 22(4-6)

38 Pages Posted: 1 Sep 2016

See all articles by Chen Li

Chen Li

New York University (NYU) - New York University (NYU), Shanghai

Yaping Wang

Peking University - Guanghua School of Management

Liansheng Wu

Peking University - Guanghua School of Management

Jason Zezhong Xiao

University of Macau ; Cardiff Business School, Cardiff University

Date Written: August 30, 2012

Abstract

We use the occasion of a change in tax policy that raised the tax rate for many of the listed companies in China to examine tax-induced earnings management (TEM) from the perspective of political connections. We find that when the tax rate increased, only those affected firms with politically connected management engaged in TEM. This suggests that, in addition to motivation for managing earnings, capability of influencing tax authorities is also an important determinant of TEM. We also find that TEM helped the firms with politically connected management to reduce their tax burden.

Keywords: China; earnings management; effective tax rate; political connections; tax policy

JEL Classification: G32; G38; H26; M41

Suggested Citation

Li, Chen and Wang, Yaping and Wu, Liansheng and Xiao, Jason Zezhong, Political Connections and Tax-Induced Earnings Management: Evidence from China (August 30, 2012). European Journal of Finance, 2016, 22(4-6) , Available at SSRN: https://ssrn.com/abstract=2832492

Chen Li

New York University (NYU) - New York University (NYU), Shanghai ( email )

1555 Century Ave
Shanghai, Shanghai 200122
China

HOME PAGE: http://sites.google.com/view/chen-li

Yaping Wang

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China
8610-62768188 (Phone)

Liansheng Wu

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Cardiff Business School, Cardiff University ( email )

Aberconway building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

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