The Role of Taxes in Earnings Management: Evidence from Writedowns of Long-term Equity Investments

Giampaolo Arachi and Valeria Bucci

FinanzArchiv: Public Finance Analysis, 2019, vol. 75, issue 3, 229-265

Abstract: This paper provides new empirical evidence on the role of taxes in discretionary asset writedowns. By focusing on a class of assets that has not been analyzed by prior research, namely long-term equity investments, and by exploiting exogenous changes in tax legislation in Italy, we are able to disentangle the influence of taxes on the decision to write down and on the magnitude of a writedown, conditional on taking the decision to write down. We find that taxes affect the timing of discretionary writedowns but not their magnitude. Consistently with this pattern, we also find that tax-driven opportunistic reporting does not significantly alter the effective tax burden of firms.

Keywords: corporate taxation; asset impairment; financial reporting; tax planning; writedowns of long-term equity investments; effective tax burden (search for similar items in EconPapers)
JEL-codes: H25 H32 K34 M41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1628/fa-2019-0003

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