Effects of Corporate Taxes on Private Firms’ Earnings Management: A Regression Discontinuity Analysis

57 Pages Posted: 25 Feb 2021 Last revised: 5 Mar 2021

See all articles by Gaowen Kong

Gaowen Kong

Guangzhou University

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology

Date Written: December 25, 2020

Abstract

We examine the impact of tax incentives on private firms’ earnings management based on a tax reform in China. Firms established after January 2002 face significant tax reduction, thus creating a large and persistent discontinuity in tax rates by establishment date. Using the regression discontinuity design, we show that tax reduction substantially increases private firms’ incentives to manage earnings, and such effect is particularly pronounced when tax collection intensity and government interventions are low. A plausible mechanism is that private firms signal promising outlooks by managing earnings to attain greater financing and improve investment/operation levels when financial constraints are removed.

Keywords: Corporate income tax, Private firms, Earnings management, Regression discontinuity design

JEL Classification: H25, G38

Suggested Citation

Kong, Gaowen and Kong, Dongmin, Effects of Corporate Taxes on Private Firms’ Earnings Management: A Regression Discontinuity Analysis (December 25, 2020). Available at SSRN: https://ssrn.com/abstract=3792758 or http://dx.doi.org/10.2139/ssrn.3792758

Gaowen Kong (Contact Author)

Guangzhou University ( email )

Guangzhou Higher Education Mega Center
Waihuanxi Road 230
Guangzhou, Guangdong 510006
China

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

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