Earnings cosmetics in a tax-driven accounting environment: evidence from Finnish public firms

Jyrki Niskanen and Matti Keloharju

European Accounting Review, 2000, vol. 9, issue 3, 443-452

Abstract: Finnish firms are known to manage earnings downwards to avoid income taxes. This study suggests that they simultaneously manage earnings upwards in a smaller scale. The idea behind this behaviour is that humans may perceive a profit of, say, 301 million as abnormally larger than a profit of 298 million. Consequently, firms tend to adjust the second leftmost digit of earnings to exceed nine in order to make the first digit of earnings larger by one. Such corporate behaviour has been previously documented in New Zealand and in the USA. Our study finds a similar phenomenon in Finland. Our results show that although the largest second digits (eight and nine) are fewer than expected, only sixes and sevens are statistically significantly managed upwards.

Date: 2000
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DOI: 10.1080/09638180020017159

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