Value-added Tax Rate Reduction,Trade-off of Tax Cost and the Strategy of Earnings Management
Tax cost is an important factor affecting earnings management.Since the emergence of research on earnings management,the impact of taxation on corporate earnings management has been an important topic in academia,result-ing in the development of a branch of literature on tax-induced earnings management.A review of the existing literature reveals that studies mainly focus on direct taxes,particularly corporate income tax,while the impact of indirect taxes on corporate earnings management remains under-examined.Unlike countries such as the United States which relies on di-rect taxes such as income tax as the primary source of tax revenue,many developing countries represented by China rely more heavily on indirect taxes for fiscal revenue.Therefore,it is more important to explore the impact of indirect taxes on corporate earnings management based on the Chinese institutional background.In addition,the logic of indirect taxes affecting corporate earnings management is fundamentally different from that of income tax.Specifically,without considering book-tax differences,firms will incur income tax costs when manipulat-ing any profit and loss accounts that affect pre-tax profits.However,indirect tax costs do not necessarily occur.Take value-added tax(VAT)as an example.VAT is mainly related to the sales of goods and the purchases of raw materials,thus mainly associated with profit and loss accounts such as revenue and operating costs in the income statement(hereinafter referred to as"VAT-related profit and loss accounts"),while its correlation with other profit and loss accounts is relatively low.When a firm manipulates a VAT-related profit and loss account,it incurs both income tax costs and VAT costs.How-ever,when a firm manipulates profit and loss accounts that are less related to VAT,e.g.,expense and non-recurring gains and losses(hereinafter referred to as"non-VAT-related profit and loss accounts"),they will face income tax costs but not VAT costs.Therefore,when VAT is incorporated into the earnings management decision,firms will weigh the relative tax costs between different account types when manipulating earnings.This trade-off does not exist when examining the im-pact of income tax.This paper takes the series of VAT rate reduction reforms implemented in China in 2017 as an opportunity to use a difference-in-differences model to examine the impact of indirect taxes on corporate earnings management.We find that the VAT rate reduction changes the earnings management strategies of firms.Specifically,firms significantly increase earnings management based on VAT-related profit and loss accounts,while significantly reducing such activities based on non-VAT-related profit and loss accounts.However,the overall trend of earnings management is declining.Furthermore,the impact of VAT on the adjustment of earnings management strategies is more significant among firms with weak abil-ity to pass on tax burden,higher income tax rates,without export business,and engaged in upward earnings management.Finally,investors respond positively to firms that adjust their earnings management strategies in a timely manner.The conclusions of this paper have at least the following two theoretical contributions.(1)It enriches the relevant lit-erature on the impact of taxation on corporate earnings management.Existing literature mainly focuses on income tax,while there is little research on the impact of VAT on corporate earnings management.Considering the logical differences between direct and indirect taxes in affecting earnings management,this paper takes the VAT rate reform as an opportu-nity to fill the research gap in corporate earnings management driven by indirect tax costs,and also responds to the calls of Dyreng & Maydew(2018)and Feng et al.(2021).(2)It enriches the research on the impact of VAT on corporate ac-counting behavior.Existing literature mainly examines the impact of VAT on corporate financial behavior,including fixed asset investment,technological innovation,and labor demand,with few studies that approach this issue from the perspec-tive of corporate accounting behavior.This paper expands the academic literature on the impact of VAT on corporate ac-counting behavior from the perspective of earnings management.
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维普
