Tax Rate Changes Under The Earnings Management Behavior Of Listed Companies And The Findings Of A Study Of Particular Accrued Items

Earnings management has been a focus of accounting research since1980’s. When the firm doing earnings management, there are double costs its faces-the financial reporting cost and the corporate income tax cost. Usually, the target of a company’s earnings management is to increase its accounting profit, and the corporate income tax cost means that the taxable income is increased along with the accounting profit, and thus the income tax of the company. In many circumstances, earnings management is a trade-off between the good-looking book profit and the income tax cost. However, it is not always so. There are some difference between the accounting principal and the tax law, that is to say, the accounting profit is not necessary the taxable profit, and the listed companies are willing to use those items which only affect the accounting profit but not the taxable profit. Such items is the focus of this research.In2007, the New Corporate Income Tax Law was introduced and came into effect in2008. The largest change the New Corporate Income Tax Law brought is that the income tax rate of corporates in China mainland is unified to25%instead of the former tax rate33%for domestic corporates and15%for foreign corporates. After that, most corporates in China would face the change of their income tax rate, which would affect their income tax cost. This tax rate change brought them motivation of earnings management, and gave the researchers a chance to study how the listed companies use taxable and non-taxable items to do earnings management. In this research, profit of a company are classified into taxable profit, operating taxable profit and non-taxable profit, and how these profits changes when tax rate changes are studied.The conclusion of this study suggest that listed companies would transfer taxable profit when the tax rate changed, especially, those companies which faces a tax rate drop will delay its taxable profit to reduce its taxation burden, but those faces a tax rate raise or no tax change do not have such behavior. However, there is no evidence that corporates uses non-taxable items to balance the accounting profit when they delay the taxable profit.