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Abstract: Among listed companies, earnings management and tax avoidance are both specific operations for
enterprise interest, following the same development strategy planning. Examining data from Chinese A share
listed companies during 2004-2006, we find a significant positive correlation between earnings management
and tax avoidance and the long-term business performance weakens this positive correlation. In particular, for
state-backed companies, their business performance has little influence on the motivation of earnings
management. This paper aims to provide advises to interest groups like regulatory authorities, investors and
executives.
Keywords: Earnings management; tax avoidance; business performance; state-backed enterprise
1 Introduction
2 Research Hypothesis
Accompanying
the
further
reforming
and
marketization, China has achieved fast economic
development, and the capital market gradually matures.
To prevail over competition, public companies
whitewash their performance index by earnings
management, thus they gain benefits via misleading
decision-makings of information users. Based on its
extensive of existence, earnings management has become
an important subject of western scholars from 1980s, and
now is drawing growing attentions. Existing researches
discuss the purposes and means of earning management
with empirical or normative analysis, and reach an
agreement on some conclusions.
Scholars including Burgstahler and Dichev (1997) and
Mills and Newberry (2001) raise that earnings
management can be detected by empirical model based
on deferred income tax expense. This research results
provide reference for the detecting of earnings
management behavior related to income tax.
Dhaliwal, Gleason and Mills (2003) study whether
corporations will manipulate income tax expense when
manipulate earnings to achieve the gold for certain
business results. This study shows that corporations
achieve the goal for certain business results firstly by
means of manipulating non-taxable items. However,
when the earning management of non-taxable items
cannot bring enough profit to achieve that goal,
corporations will through certain means reduce income
tax owed to realize the profit target. This research
provides theoretical support for realizing earnings
management by tax means.
447
448
st
11
i 7 Industryi
Goods
2006
t 1985Yeart
t2004
i1
4 Empirical results
According to the regression results of Diff, it shows
that there is a significant positive correlation between
Diff and DA, which identify with the correlation analysis,
illustrating the significant positive correlation between
earnings management and tax avoidance. So Hypothesis
1 is valid.
Meanwhile, the coefficient of DA*Performance passes
the notability test, whose value is negative, illustrating
the long-term business performance weakens the positive
correlation between earnings management and tax
1
The assignment rule: assign 1 when ROA in the both previous two
years exceeds industry average, otherwise 0.
2
Except financial industry, sample companies are sorted to 12 types
according to the China Securities Regulatory Commission (CSRC ),
thus 11 dummy variables are constructed. The sample companies are
Type 1 to Type 12 and when a certain sample is Type I, Industryi=1,
Coefficient
Collinearity Statistics
t-value
Sig
Tolerance
VIF
Constant
-0.759
-11.820
0.000
DA
0.400
5.200
0.000
0.637
1.569
Performance
0.044
6.721
0.000
0.797
1.254
DA*Performance
-0.445
-3.358
0.001
0.643
1.556
Level
-0.018
-2.738
0.006
0.944
1.060
Size
0.035
11.726
0.000
0.849
1.178
FixedAss
-0.036
-2.029
0.043
0.734
1.363
Goods
-0.031
-1.268
0.205
0.741
1.350
Industry1
-0.043 -1.988 0.047
0.740
1.351
Dependent variable
Diff, R2=1.313, Adjusted
R2=0.125,
Industry2
2.730
0.006
0.826
1.211
the goodness-of-fit0.078
is acceptable
Industry3
0.037
2.992
0.003
0.209
4.776
Industry4
3.1773, it0.002
1.922the
When testing 0.055
hypothesis
need to 0.520
distinguish
-0.002
-0.067
0.947
0.805
1.243
stock rights of sample companies. This study divides
Industry6
2.979
0.003
0.581
1.720
them by the ratio0.053
of state-owned
shares in
total shares,
Industry5
Industry7
0.013
0.757
0.449
0.560
1.785
Industry8
0.016
1.060
0.289
0.487
2.054
Industry9
0.011
0.563
0.514
0.581
1.720
Industry10
0.043
2.305
0.021
0.630
1.587
Industry11
0.028
0.941
0.347
0.861
1.161
Year1
0.030
4.431
0.000
0.734
1.362
Year2
-0.005
-0.298
0.766
0.616
1.624
holding that ones with the ratio above 50% are statebacked, otherwise are not.
The regression results in Table 2 show that, when stateowned shares are in majority, there is still a significant
positive correlation between Diff and DA, illustrating
strong tax-avoidance motivation. Considering the
coefficient of DA*Performance is not significant, the
performance of these listed companies does not have a
significant effect on tax-avoidance motivation in earnings
management.
DA
0.389
5.814 0.000
0.674
1.483
Performance
0.040
6.833 0.000
0.812
1.232
DA*Performance
-0.582
-4.762 0.000
0.685
1.460
Level
-0.016
-3.015 0.003
0.941
1.063
Size
0.020
6.980 0.000
0.878
1.139
FixedAss
-0.025
-1.588 0.113
0.747
1.340
Goods
-0.012
-0.562 0.574
0.753
1.328
Industry1
Industry2
-0.072
-3.941 0.000
0.773
1.293
0.044
1.342 0.180
0.914
1.094
Industry3
0.036
3.566 0.000
0.252
3.968
Industry4
0.037
2.357 0.019
0.628
1.593
Industry5
0.018
0.733 0.464
0.878
1.140
Industry6
Collinearity Statistics
0.040
2.305 0.021
0.728
1.374
Industry7
0.004
0.308 0.758
0.590
1.694
Tolerance
Industry8
0.015
1.183 0.237
0.517
1.933
Industry9
0.006
0.426 0.671
0.601
1.665
Industry10
2.927 0.003
0.671
1.400
Indusry11
0.046
0.009
0.325 0.745
0.884
1.131
Year1
0.010
1.589 0.112
0.0774
1.292
Coefficient t-value
s
-1.203
0.401
Performance
0.048
-7.768
1.967
2.999
Sig
VIF
0.000
0.050
0.003
0.552
0.759
1.813
1.318
DA*Performance
-0.381
-1.201
0.230
0.548
1.826
Level
-0.040
-1.811
0.071
0.917
1.090
Size
0.056
8.043
0.000
0.790
1.265
FixedAss
-0.050
-1.139
0.255
0.686
1.458
Goods
-0.050
-0.813
0.417
0.703
1.422
Industry1
Industry2
0.010
0.149
0.881
0.583
1.715
0.056
0.888
0.375
0.522
1.915
Industry3
0.032
0.745
0.457
0.103
9.754
Industry4
0.056
1.137
0.256
0.260
3.843
Industry5
-0.034
-0.563
0.574
0.529
1.891
Industry6
0.040
0.809
0.419
0.274
3.655
Industry7
0.016
0.286
0.775
0.429
2.329
Industry8
0.008
0.153
0.879
0.355
2.814
Industry9
0.034
0.593
0.553
0.478
2.090
Industry10
0.019
0.335
0.738
0.452
2.213
Industry11
0.066
0.794
0.427
0.738
1.354
Year1
0.066
3.684
0.000
0.607
1.647
Year2
-0.005
-0.298
0.766
0.616
1.624
Collinearity Statistics
Variables
449
Year2
-0.0007
-1.185 0.236
0.0781
1.280
5 Conclusions
In this paper, through an empirical study using the
data on exchange listed companies in China during
2004-2006, we draw the following conclusion.
Earnings management and tax-avoidance behavior are
common among Chinese listed companies, but they do
not present a consistency. In analyses related to
earnings management and tax avoidance, there is a
significant positive correlation between them, which
shows significant tax-avoidance motivation in earnings
management. Meanwhile, when companies have good
business performance, the tax burden will be relatively
Tolerance
Constant
-0.439
References
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VIF
-7.203 0.000
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[4]
of