Multidrivers for earnings managementspecial focus on tax incentives

Zusammenfassung

Accounting financial information is a relevant element in business to measure and to communicate business performance (Watts & amp; Zimmermann, 1986). External decision makers as stockholders, analysts, external auditors or investors need information about business activities to make their decisions or to provide an opinion about companies¿ performance. In a similar venue, internal decision makers, as managers, need also useful information to manage firm¿s activities. Thus, financial statements must provide useful information about companies¿ financial situation to facilitate stakeholders¿ decision making (Mackenzi et al, 2012). However, the presence of significant earnings management originated from information asymmetry and agency problems could affect such features and their effects could be noted in the firm, in the organizational field and societies in general (Cooper, Dacin & amp; Palmer, 2013). Previous studies have shown varying incentives that drive managers to manipulate the results of the company. On one hand, internal motivations for earnings management can be grouped into three categories: 1) contracting motivations, compensation and lending contracts, 2) capital market motivation, and 3) type of company. On the other hand, external causes are given mainly by institutional settings, cultural factors, bankruptcy proceedings, corporate tax rates, and changes in regulation. Nevertheless, the research questions of this dissertation come from the interaction between some of the motivations for earnings management that surprisingly remain unaddressed. In this way, chapter 1 review the literature concerning earnings management and the implications of the latter for stakeholders and firms. Using the Web of Science database, I investigate the most cited papers on this topic. A classification of the causes that drive managers to manipulate earnings is presented. I also explore the papers that show the trade-off faced by managers among the two techniques usually recognised in the earnings management literature, real activity and accrual manipulation, and when they are normally used. One of the major implications of earnings management is the deterioration of information quality in the financial statements, which could mislead stakeholders¿ decisions. In chapter 2 we look at changes in regulation since it could be an incentive to manipulate earnings. Using a sample of 4,420 unique private firms and 20,671 firm-year observations, we examine whether companies generate tax savings by shifting profits to a period with a lower tax rate due to the introduction of a staggered tax reform. We show that companies engage in accrual-based earnings management to shift profits in order to generate tax savings. By doing so, companies detract earnings quality provided in financial reports. Similarly, the introduction of an accounting reform which tighter accounting standards leaded firms to engage in more income decreasing earnings management. The peculiarity of the setting allows us to analyse the effect of two reforms at the same time but with different incentives which turns the study into a much more interesting one. Taking together, our findings yield important insights of firms¿ performance around different changes in legislation in a code-law country. Chapter 3 analyses whether multinational groups engage in earnings management because of the tax incentives within the group, institutional settings and cultural factors of the countries where they operate. The analysis has been carried out using real activity and accrual manipulation as proxies of earnings management. Our results show that tax incentives within a group are a significant mitigating element for earnings management while institutional settings and cultural factors are important drivers for manipulation. Furthermore, our results provide evidence of the substitutive character of earnings management and profit shifting.