Fiscal Support and Earnings Management

Posted: 4 Jul 2012 Last revised: 14 Feb 2019

Date Written: December 14, 2013

Abstract

It is well documented that firms tend to manipulate earnings before IPO (initial public offerings) and SEO (seasoned equity offerings). This study contributes to the literature by providing the first evidence on whether and how fiscal support in the form of preferential tax treatment and financial subsidy affects a firm’s earnings management behaviors. Using data for Chinese firms that have conducted IPO and SEO, I find that firms have a lower level of earnings management prior to the offerings if they enjoy more preferential tax treatment or more financial subsidies from local governments. My results are consistent with the view that firms that receive stronger fiscal support have smaller demand for earnings management, which is a costly tool for a firm to achieve its desired earnings targets.

Keywords: Fiscal support, Earnings management, Financial subsidy, Income tax preference

JEL Classification: M41, M48, G14, G15, G18, H32

Suggested Citation

He, Guanming, Fiscal Support and Earnings Management (December 14, 2013). International Journal of Accounting, Vol. 51, No. 1, 2016, Available at SSRN: https://ssrn.com/abstract=2099168 or http://dx.doi.org/10.2139/ssrn.2099168

Guanming He (Contact Author)

Durham University ( email )

Durham
United Kingdom

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