An analysis of capital gains tax-induced earnings management

Thomas Porcano

International Advances in Economic Research, 1997, vol. 3, issue 4, 395-408

Abstract: Since 1974, there have been four changes in the corporate tax rate on net capital gains. In each instance a firm had an incentive to alter its capital gains taking in order to maximize its after-tax cash flows. This paper presents a longitudinal analysis of firms' responses to the four rate changes and in doing so provides additional evidence regarding tax-induced earnings management. Most studies analyze firms' responses to tax law change in one tax act (e.g., The Tax Reform Act of 1986), yet firm response to one act might not be the typical response. Results from this study confirm such a phenomenon. The results also provide additional evidence on the association of firm characteristics with tax-induced earnings management. Copyright International Atlantic Economic Society 1997

Date: 1997
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DOI: 10.1007/BF02295218

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