A Correlation Analysis On Earnings Management And Income Tax Burden

Accounting earnings have been treated as the most important concepts of accounting information for listed companies, and are paid more attention to external stakeholders. As a comprehensive measure for for evaluating the corporate performance performance, accounting earnings not only affect resource allocation of the company to a certain extent, but also determine the fate of the company (such as listing, raising equity, avoiding being delisted and delisting). Because of the needs of the contractual arrangements, capital markets, tax avoidance and political costs and other factors, listed companies will manage earnings consciously.However, earnings management of listed companies will face financial reporting costs (Such as Debt contract terminated, the increase in finance costs, the fall in share prices) and tax costs (the increase of income tax burden). Only when a listed company fails to achieve earnings target do the financial reporting costs occur. Therefore, financial reporting costs are the indirect costs of earnings management. An increase in income tax expense will be brought about in the process of increasing accounting profits by earnings management, so tax cost is the direct cost of the earnings management. Specifically, income tax expenses will be changed when the earnings management by taxable earnings is taken by listed companies. Income tax expense does not change when non-taxable items are adjusted by managers. It means that the managers of listed companies will adjust the non-taxable item earnings to reach the purpose of the tax cost of earnings management effectively.With domestic and overseas prevailing of earnings management and tax avoidance and gradual vanishing impact caused by the replacement of the old and new income tax law on enterprises, this paper endeavors to make an empirical analysis of the financial data of the A-share company listed on the Shanghai Stock Exchange. Non-taxable earnings manipulation and accrued profit manipulation are calculated through regression analysis. Finally, the paper will provide a correlation analysis on the relationship among Non-taxable earnings manipulation, accrued profits and the effective income tax rate. Listed companies have the motivation to reduce the tax cost of earnings management through manipulating non-taxable item earnings. In addition, this study also finds that the higher the income tax burden of the listed companies, the stronger the motivation of reducing income tax expenses through the non-taxable items adjustment they have. This study will help stakeholders deepen the understanding of earnings management of listed companies, and assist them to make the correct decisions.