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
Date Written: November 1, 2020
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: Suggested Citation