Does Tax Enforcement Have a Spillover Effect on Qualitative Disclosure? Evidence From Tone Management in the MD&A

Nan-Ting Kuo, Ya-Guang Du () and Cheng-Few Lee ()
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Nan-Ting Kuo: Business School, Shandong University of Technology, Zibo 255000, Shandong, P. R. China
Ya-Guang Du: Institute of Industrial Economics, Chinese Academy of Social Sciences, Beijing 100006, P. R. China
Cheng-Few Lee: Rutgers Business School, Rutgers University, Newark, NJ 07102, USA

The International Journal of Accounting (TIJA), 2025, vol. 60, issue 03, 1-39

Abstract: SynopsisThe research problemOur study explores the association between tax enforcement and tone management in the Management’s Discussion and Analysis (MD&A).MotivationPrior studies have shown that tax enforcement influences financial reporting due to the tax authority’s scrutiny of financial statements to detect tax evasion, which deters financial reporting manipulation. However, the spillover effect of tax enforcement on qualitative disclosures remains unexplored. Motivated by the relevance of MD&A as a comprehensive discussion of a firm’s conditions and a target for manipulation, we investigate the association between tax enforcement and tone management.The test hypothesesWe test two competing hypotheses: increased tax enforcement is associated with more tone management, and it is associated with lesser tone management.Target populationOur study should be of interest to corporate stakeholders, including managers, investors, regulatory authorities, and policymakers.Adopted methodologyOrdinary least squares regressions, staggered difference-in-differences model, and path analysis.AnalysisOur study explores a sample of Chinese A-share listed firms from 2008 to 2020. We measure tone management using Huang et al.’s [(2014). Tone management. The Accounting Review, 89(3), 1083–1113. https://doi.org/10.2308/accr-50684] model, which regresses the tone level in MD&A on firm fundamentals, and use the discretionary tone portion as a proxy. Tone level is calculated as the difference between the number of positive and negative sentiment words divided by their sum.FindingsWe find that increased tax enforcement is associated with lesser tone management. Path analysis shows that this effect is driven by constraints on earnings management and enhanced accounting conservatism, suggesting that tax enforcement improves financial reporting quality, which in turn disciplines disclosure tone. Cross-sectional tests further indicate that the effect of increased tax enforcement varies with tax compliance levels, managerial incentives to influence investor perceptions, and external monitoring.

Keywords: Tax enforcement; qualitative disclosure; tone management; accounting information (search for similar items in EconPapers)
JEL-codes: E62 M41 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1142/S1094406025500027

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