Dividends and Tax Avoidance as Drivers of Earnings Management: Evidence from Dividend-Paying Private SMEs in Finland

JOURNAL OF SMALL BUSINESS MANAGEMENT https://doi.org/10.1080/00472778.2020.1824526

34 Pages Posted: 19 Jan 2021 Last revised: 20 Jan 2021

See all articles by Jussi Karjalainen

Jussi Karjalainen

University of Eastern Finland - Department of Business

Eero Kasanen

Helsinki School of Economics

Juha Kinnunen

Aalto University School of Business

Jyrki Niskanen

University of Tampere

Date Written: November 1, 2020

Abstract

Using a sample covering practically all dividend-paying small and medium-sized private companies in Finland during 2006–2010, we document that earnings management in these companies is driven by two concurrent forces: the willingness to pay (tax-exempt) dividends and avoiding unnecessary company income tax. Moreover, we show that the need for income increasing earnings management enabling current dividend distribution is mitigated by the amount of retained earnings from prior years. This article adds to the existing literature by providing empirical evidence for dividend and tax-driven earnings management in private SMEs facing neither political pressures nor capital market incentives for earnings disclosures.

Keywords: Private SMEs, Earnings Management, Dividend Tax

JEL Classification: G35, M41

Suggested Citation

Karjalainen, Jussi and Kasanen, Eero and Kinnunen, Juha and Niskanen, Jyrki, Dividends and Tax Avoidance as Drivers of Earnings Management: Evidence from Dividend-Paying Private SMEs in Finland (November 1, 2020). JOURNAL OF SMALL BUSINESS MANAGEMENT https://doi.org/10.1080/00472778.2020.1824526, Available at SSRN: https://ssrn.com/abstract=3739370

Jussi Karjalainen

University of Eastern Finland - Department of Business ( email )

Finland

Eero Kasanen

Helsinki School of Economics ( email )

P.O. Box 1210
Department of Accounting and Finance
Helsinki 00100
Finland

Juha Kinnunen (Contact Author)

Aalto University School of Business ( email )

PO Box 21220
FI-00076 AALTO
Helsinki
Finland

Jyrki Niskanen

University of Tampere ( email )

Department of Business Economics PL 607
FIN-33101 Tampere
Finland
+358 3 215 7214 (Fax)

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