The Effect of Tax Authority Enforcement on Earnings Informativeness

European Accounting Review, forthcoming.

50 Pages Posted: 15 Jun 2021

Date Written: June 10, 2020

Abstract

This paper examines the impact of tax authority monitoring and enforcement on earnings informativeness. Using a staggered difference-in-differences design, I exploit the introduction of a new tax administration information system as a proxy for increased tax enforcement. The results imply that the informativeness of earnings improves with an increase in tax authority enforcement. Furthermore, I find that these results are concentrated in firms that are tax noncompliant, firms that are profitable and firms that have more severe income diversion and downward earnings manipulation. Additional tests show that tax expenses are more informative when tax enforcement increases. Overall, this study suggests that tax authority oversight engenders a positive effect on earnings informativeness by reducing the noise in earnings signals.

Keywords: Tax enforcement; Earning informativeness; Golden Tax Project; Tax avoidance; China

JEL Classification: G14, G38, M41

Suggested Citation

Zhao, Le, The Effect of Tax Authority Enforcement on Earnings Informativeness (June 10, 2020). European Accounting Review, forthcoming., Available at SSRN: https://ssrn.com/abstract=3864786

Le Zhao (Contact Author)

Nankai University ( email )

94 Weijin Road
Tianjin, 300071
China

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