Earnings and balance-sheet properties and the interplay of tax incentives and tax enforcement
by Thomas R. Loy
International Journal of Economics and Accounting (IJEA), Vol. 10, No. 4, 2021

Abstract: This paper analyses the joint association of tax incentives and tax law enforcement strictness on private firms' earnings and balance sheet properties. It answers a call for additional research on why "here is (…) substantial within-country variation in managers' incentives to [manage] earnings" [LaFond et al., (2007), p.14]. There is evidence that tax laws in practice are enacted to a different extent within a country's homogenous legal framework. The key results are that stricter tax law enforcement impairs managers' ability or willingness to engage in income-decreasing accrual earnings management. On the downside, managers instead seem to resort to real earnings management choices which are associated with potentially negative long-term real business impact but generally covered by the business judgement rule.

Online publication date: Mon, 18-Oct-2021

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