Re-examining the Relation between Financial and Tax Reporting Aggressiveness
1
조회
0
다운로드
0
인용
0
참고문헌
키워드
초록
This study contributes to the ongoing debate concerning whether firms that exhibit aggressive financial reporting are correspondingly more or less aggressive in tax reporting. Drawing upon the agency theory, it would be reasonable to anticipate that managers, in pursuit of private benefits, will seek to maximize reported earnings while simultaneously minimizing tax liabilities. However, given that tax regulatory agencies utilize financial information for monitoring purposes, the detection risk of tax reporting aggressiveness (TRA) and the associated penalties escalate with the degree of financial reporting aggressiveness (FRA), compelling firms to weigh the competing incentives of financial and tax reporting. Our empirical investigation reveals that while TRA increases with FRA at lower levels of FRA, this relation reverses at higher levels of FRA, resulting in an inverted U-shaped relation between FRA and TRA. We also find that the negative association between FRA and TRA observed at high levels of FRA is stronger during the periods when tax regulatory agencies rely more on financial reporting. These results indicate that both FRA and TRA are intricately determined through a manager’s cost-benefit analysis and thus necessitate consideration as a unified strategic approach. Additionally, our findings suggest that empirical models assuming a linear relationship may inadequately capture the joint determination of FRA and TRA.
Abstract
This study contributes to the ongoing debate concerning whether firms that exhibit aggressive financial reporting are correspondingly more or less aggressive in tax reporting. Drawing upon the agency theory, it would be reasonable to anticipate that managers, in pursuit of private benefits, will seek to maximize reported earnings while simultaneously minimizing tax liabilities. However, given that tax regulatory agencies utilize financial information for monitoring purposes, the detection risk of tax reporting aggressiveness (TRA) and the associated penalties escalate with the degree of financial reporting aggressiveness (FRA), compelling firms to weigh the competing incentives of financial and tax reporting. Our empirical investigation reveals that while TRA increases with FRA at lower levels of FRA, this relation reverses at higher levels of FRA, resulting in an inverted U-shaped relation between FRA and TRA. We also find that the negative association between FRA and TRA observed at high levels of FRA is stronger during the periods when tax regulatory agencies rely more on financial reporting. These results indicate that both FRA and TRA are intricately determined through a manager’s cost-benefit analysis and thus necessitate consideration as a unified strategic approach. Additionally, our findings suggest that empirical models assuming a linear relationship may inadequately capture the joint determination of FRA and TRA.
참고문헌 (48)
- Aghion, P., "Competition and Innovation : An Inverted-U Relationship", The Quarterly Journal of Economics, 120(2), pp.701~728 (2005)
- Altman, E. I., "Financial Ratios Discriminant Analysis and the Prediction of Corporate Bankruptcy", Journal of Finance, 23(4), pp.589~609 (1968)
- Balakrishnan, K., "Tax Aggressiveness and Corporate Transparency", The Accounting Review, 94(1), pp.45~69 (2019)
- Blundell, R., "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models", Journal of Econometrics, 87, pp.115~143 (1998)
- Bozanic, Z., "IRS Attention", Journal of Accounting Research, 55(1), pp.79~114 (2017)
- Chen, N. X., "Do Analysts Matter for Corporate Tax Planning? Evidence from a Natural Experiment", Contemporary Accounting Research, 35(2), pp.794~829 (2018)
- Chen, K. C. W., "The 1993 Tax Rate Increase and Deferred Tax Adjustments", Journal of Accounting Research, 38(1), pp.23~44 (2000)
- Cloyd, C. B., "The Effects of Financial Accounting Conformity on Recommendation of Tax Preparers", Journal of American Taxation Association, 19(2), pp.50~70 (1995)
- Cloyd, C. B., "The Use of Financial Accounting Choice to Support Aggressive Tax Positions : Public and Private Firms", Journal of Accounting Research, 34(1), pp.23~43 (1996)
- Collins, D. W., "The Effects of Firm Growth and Model Specification Choices on Tests of Earnings Management in Quarterly Settings", The Accounting Review, 92(2), pp.69~100 (2017)
- Chyz, J. A., "Can Paying ‘Too Much’ or ‘Too Little’ Tax Contribute to Forced CEO Turnover?", The Accounting Review, 93(1), pp.103~130 (2018)
- Dechow, P. M., "Detecting Earnings Management", The Accounting Review, 70(2), pp.193~225 (1995)
- Desai, M., "The Degradation of Reported Corporate Profits", Journal of Economic Perspectives, 19(4), pp.171~192 (2005)
- Desai, M. A., "Corporate Tax Avoidance and High-Powered Incentives", Journal of Financial Economics, 79(1), pp.145~179 (2006)
- Dhaliwal, D. S., "The Taxable and Book Income Motivations for a LIFO Layer Liquidation", Journal of Accounting Research, 32(2), pp.278~289 (1994)
- Dhaliwal, D., "Did the 2003 Tax Act Reduce the Cost of Equity Capital?", Journal of Accounting and Economics, 43(1), pp.121~150 (2003)
- Dyreng, S. D., "Changes in Corporate Effective Tax Rates Over the Past 25 Years", Journal of Financial Economics, 124, pp.441~463 (2017)
- Engel, E., "Debt-Equity Hybrid Securities", Journal of Accounting Research, 37(2), pp.249~274 (1999)
- Erickson, M., "How Much Will Firms Pay for Earnings That Do Not Exist? Evidence of Taxes Paid on Allegedly Fraudulent Earnings?", The Accounting Review, 79(2), pp.387~408 (2004)
- Francis, J. R., "Determinants of Corporate Pension Funding Strategy", Journal of Accounting and Economics, 9(1), pp.35~59 (1987)
- Frank, M. M., "Tax Reporting Aggressiveness and Its Relation to Aggressive Financial Reporting", The Accounting Review, 84(2), pp.467~496 (2009)
- Gallemore, J., "The Importance of the Internal Information Environment for Tax Avoidance", Journal of Accounting and Economics, 61(1), pp.149~167 (2015)
- Gompers, P., "Corporate Governance and Equity Prices", Quarterly Journal of Economics, 118(1), pp.107~155 (2003)
- Goh, B. W., "The Effect of Corporate Tax Avoidance on the Cost of Equity", The Accounting Review, 91(6), pp.1647~1670 (2016)
- Guidry, F., "Earnings-Based Bonus Plans and Earnings Management by Business-Unit Managers", Journal Accounting and Economics, 26(1-3), pp.113~142 (1999)
- Hanlon, M., "The Persistence and Pricing of Earnings, Accruals, and Cash Flows When Firms Have Large Book–Tax Differences", The Accounting Review, 80(1), pp.137~166 (2005)
- Hanlon, M., "The Effect of Tax Authority and Enforcement on Financial Reporting Quality", The Journal of American Taxation Association, 36(2), pp.137~170 (2014)
- Hasan, I., "Beauty Is the Eye of the Beholder : The Effect of Corporate Tax Avoidance on the Cost of Bank Loans", Journal of Financial Economics, 113(1), pp.109~130 (2014)
- Hope, O. -K., "Tax Avoidance and Geographic Earnings Disclosure", Journal of Accounting and Economics, 56(2-3), pp.170~189 (2013)
- Jensen, M. C., "Theory of the Firm : Managerial Behavior, Agency Costs and Ownership Structure", Journal of Financial Economics, 3(4), pp.305~360 (1976)
- Kerr, J. N., "Transparency, Information Shocks, and Tax Avoidance", Contemporary Accounting Research, 36(2), pp.1146~1183 (2019)
- Kothari, S. P., "Performance Matched Discretionary Accrual Measures", Journal of Accounting and Economics, 39(1), pp.163~197 (2005)
- Kubick, T. R., "The Effects of Regulatory Scrutiny on Tax Avoidance : An Examination of SEC Comment Letters", The Accounting Review, 91(6), pp.1751~1780 (2016)
- Lennox, C., "Tax Aggressiveness and Accounting Fraud", Journal of Accounting Research, 51(4), pp.738~778 (2013)
- Lind, J. T., "With or Without U? The Appropriate Test for a U-Shaped Relationship", Oxford Bulletin of Economics and Statistics, 72(1), pp.109~118 (2010)
- Mason, P., "Does IRS Monitoring Deter Managers From Committing Accounting Fraud?", Journal of Accounting Auditing and Finance, 37(3), pp.700~722 (2022)
- Mills, L. F., "Book–Tax Differences and Internal Revenue Service Adjustments", Journal of Accounting Research, 36(2), pp.343~356 (1998)
- Mills, L. F., "Strategic Tax and Financial Reporting Decisions", Contemporary Accounting Research, 17(1), pp.85~106 (2000)
- Owens, E. L., "Idiosyncratic Shocks to Firm Underlying Economics and Abnormal Accruals", The Accounting Review, 92(2), pp.183~219 (2017)
- Phillips, J., "Earnings Management : New Evidence Based on Deferred Tax Expense", The Accounting Review, 78(2), pp.491~521 (2003)
- Powers, K., "How Do CEO Incentives Affect Corporate Tax Planning and Financial Reporting of Income Taxes?", Review of Accounting Studies, 21(2), pp.672~710 (2016)
- Prilmeier, R., "Why Do Loans Contain Covenants? Evidence from Lending Relationship", Journal of Financial Economics, 123, pp.558~579 (2017)
- Robinson, L. A., "Do Firms Incur Costs to Avoid Reducing Pre-Tax Earnings? Evidence from the Accounting for Low-Income Housing Tax Credits", The Accounting Review, 85(2), pp.637~669 (2010)
- Shackelford, D., "Empirical Tax Research in Accounting", Journal of Accounting and Economics, 31(1), pp.321~387 (2001)
- Weber, D., "Do Analysts and Investors Fully Appreciate the Implications of Book-Tax Differences for Future Earnings?", Contemporary Accounting Research, 26(4), pp.1175~1206 (2009)
- Wilson, R. J., "An Examination of Corporate Tax Shelter Participants", The Accounting Review, 84(3), pp.969~999 (2009)
- Windmeijer, F., "A Finite Sample Correction for the Variance of Linear Efficient Two-Step GMM Estimators", Journal of Econometrics, 126, pp.25~51 (2005)
- Wintoki, M. B., "Endogeneity and the Dynamics of Internal Corporate Governance", Journal of Financial Economics, 105(3), pp.581~606 (2012)