Tax Avoidance Motives Earnings Management And Its Influencing Factors Research

Reducing corporate tax burden has always been an important motivation of earnings management. There are three kinds of studies lines in the tax motivated earnings management. The first kind has concern of the choices of companies on inventory accounting policy, and concluded that firms manage inventory on the LIFO method basis to reduce the corporate tax burden. The second kind consists of the Book-tax difference and related earnings management .The evidence from this kind of study has suggest that company makes full use of the differences between the tax laws and the accounting system, when the management is increasing earnings. The third kind focuses on the relationship between tax rates change and tax motivated earnings management. By examining the tax-induced earnings management in response to the tax rat changes during the implementation period of the Tax Reform Act of 1986, foreign researchers have proven that US corporations attempt to mitigate rather than minimize tax costs and firms which the nontax costs are less than the tax decrease will be expected to defer income. Nontax costs are political costs, costs of violating debt covenant restrictions, and costs associated with management compensation plans. There is very little empirical analysis concerning the third kind of tax-induced earnings management on China's listed companies. Did companies manage earnings in response to the tax rat changes? What factors influences the earnings management? Studying these issues, we can provide evidence of management in response to a decrease in the statutory corporate tax rate. In addition, the results will enrich the literature of China's listed companies'earnings management,and make policy implications to the income tax reform.The Tax Reform Act of 2008 reduced the corporate tax rate from 33 percent to 25 percent. If managers attempt to maximize firm value by minimizing tax costs, this tax rate change would have provided a substantial incentive to defer income in the year prior to the effective date of the new enterprise income. While tax-induced earnings management may conflict with other motivations for earnings management, managers who engage in this form of tax-induced earnings management typically trade off tax savings with reductions in book income and stakeholder value. Based on our unique background, first, state-controlled firms and non-state-controlled firms pursue different interests; and constitution of ownership may affect tax-induced earnings management. Second, the board of directors plays a crucial role in governance structure, and has great effect on the earnings management. The independent directors may affect the tax-induced earnings management. Third, the first shareholder may affect the tax-induced earnings management for private benefits. By separating total accruals into two types, current accruals and non-current accruals, this study will use current accruals as the proxy variables of tax motivated earnings management, and use empirical test complemented by theoretical deduction to find answers to these questions. The data used in this research are from China's Shanghai and Shenzhen A-share listed companyAccording to empirical tests, main conclusions are as follows: (1) Firms have negative current accruals in the year preceding the TRA tax rate reduction, and non-state-controlled firms make greater negative current accruals than state-controlled firms in the year preceding the TRA tax rate reduction.(2) The portion of independent directors in the board is positively related to current accruals.(3) The percentage of the largest stock-holders is positively related to current accruals. The results of this paper not only provide evidence to explains tax-induced earnings management, but also have implications for the future development of earnings management.