Tax-induced fiscal year extension and earnings management
Abstract
Purpose
The purpose of this paper is to examine three different responses to the Finnish 2005 tax reform that, among other things, reduced the corporate tax rate and hiked dividend taxation. Focus lies on the factors influencing the decision to change the fiscal year-end and whether earnings management is more prevalent when the decision is not taken.
Design/methodology/approach
This study uses the financial statement data of Finnish private firms and studies 350 fiscal year-end changing firms and 700 non-changing firms with logistic and linear regression analysis. Discretionary accruals are the proxy for earnings management.
Findings
The results suggest that firms seize the window of opportunity and extend fiscal years depending on the magnitude of the expected tax savings. Firms that do not change their fiscal year-end engage in more tax-induced earnings management. In terms of economic consequences, the earnings management approach is less economically significant.
Research limitations/implications
This study only examines a limited number of firms that change their fiscal year-end, hence, care has been exercised in generalising the findings.
Practical implications
The findings may be considered when structuring future tax reforms, particularly when considering transition rules relating to changes in fiscal year-ends. The study may also have implications beyond tax reforms since the evidence of opportunistic changes in the fiscal year-end can be informative for tax authorities, independent auditors and creditors.
Originality/value
This study contributes to the relatively scarce literature on private firm responses to tax policy changes by analysing both upward and downward earnings management, as well as changes in the fiscal year-end. This is in contrast to previous research that mainly focusses on listed firms and absolute earnings management or earnings management in one direction.
Keywords
Acknowledgements
The author acknowledges Dr Julia Mundy (editor), two anonymous reviewers, Henrik Höglund, Tobias Svanström, Stefan Sundgren, and Tage Vest for their constructive comments and valuable suggestions. The author is also grateful for financial support from the Evald and Hilda Nissi Foundation, the Nordic Tax Research Council, the Foundation of Economic Education (Grant Number 160312), and the Society of Swedish Literature in Finland.
Citation
Sundvik, D. (2017), "Tax-induced fiscal year extension and earnings management", Journal of Applied Accounting Research, Vol. 18 No. 3, pp. 356-374. https://doi.org/10.1108/JAAR-06-2015-0051
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited