Tax-Induced Earnings Management in Emerging Markets: Evidence from China

Posted: 27 Nov 2011

See all articles by Bing-Xuan Lin

Bing-Xuan Lin

University of Rhode Island

Rui Lu

Sun Yat-Sen University (SYSU) - Lingnan (University) College

Ting Zhang

University of Dayton - School of Business Administration

Date Written: November 25, 2011

Abstract

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

Lin, Bing-Xuan and Lu, Rui and Zhang, Ting, Tax-Induced Earnings Management in Emerging Markets: Evidence from China (November 25, 2011). Journal of American Taxation Association, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1964836

Bing-Xuan Lin

University of Rhode Island ( email )

7 Lippitt Rd
Kingston, RI 02881
United States
401-874-4895 (Phone)
401-874-4312 (Fax)

Rui Lu (Contact Author)

Sun Yat-Sen University (SYSU) - Lingnan (University) College ( email )

135 Xingang Xi Road
Guangzhou, Guangdong 510275
China

Ting Zhang

University of Dayton - School of Business Administration ( email )

300 College Park
Dayton, OH 45469
United States

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