Earnings and balance-sheet properties and the interplay of tax incentives and tax enforcement

Thomas R. Loy

International Journal of Economics and Accounting, 2021, vol. 10, issue 4, 421-449

Abstract: This paper analyses 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 "here 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 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 generally covered by the business judgement rule.

Keywords: financial reporting; tax incentives; tax enforcement. (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijecac:v:10:y:2021:i:4:p:421-449

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