Tax planning and earnings management: their impact on earnings persistence

Abstract

Purpose

This study investigates the impact of tax planning, both independently and in conjunction with earnings management, on the persistence of earnings and its various components.

Design/methodology/approach

In this study, tax planning refers to corporate strategies aimed at minimizing taxes, while earnings management involves manipulating reported earnings through accounting accruals. The analysis uses a dataset of US companies from 1989 to 2016 and includes a series of regression tests.

Findings

The study finds that firms implementing aggressive tax strategies exhibit lower persistence in cash flows from operations and earnings. Furthermore, companies using both aggressive tax planning and earnings management techniques show the lowest persistence in total accruals, cash flows from operations and reported earnings.

Research limitations/implications

Our sample of US firms limits generalizability. Future research could explore the international impacts of tax planning and earnings management on earnings quality and include post-2016 data for insights on the 2018 tax cuts and COVID-19. Investigating other earnings quality measures and their influence on investors and analysts could enhance performance assessment.

Practical implications

This research identifies key factors influencing the interpretation of financial statements, offering valuable insights for regulators, auditors, tax authorities, financial analysts and other users with significant practical and social implications.

Originality/value

This study contributes to prior research by highlighting the need to investigate the real effects of tax avoidance and extends prior research by examining the impact of high levels of tax planning, along with aggressive earnings management, on earnings persistence.

Citation

Chen, Y., Niu, F. and Zeng, T. (2024), "Tax planning and earnings management: their impact on earnings persistence", Journal of Applied Accounting Research, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAAR-02-2024-0071