Tax-Induced Earnings Management in Emerging Markets: Evidence from China
Posted: 27 Nov 2011
Date Written: November 25, 2011
China issued the New Enterprise Income Tax Law in 2007, which changed the corporate income tax rate from 33% to 25% and came into effect in 2008. Using the simulated marginal tax rate as an indicator of firms’ earnings management incentives, and discretionary current accruals as a proxy for earnings management, we find significant tax-induced earnings management in 2007. However, the downward earnings management becomes less obvious for firms that have a greater percentage of shares owned by the state-owned enterprises, have an audit committee on the board, and disclose certified internal control reports.
Keywords: Tax, Earnings management, Emerging Markets, Simulated marginal tax rate, Discretionary current accruals
JEL Classification: M41, G30
Suggested Citation: Suggested Citation