Anticipated Reductions in Tax Rates and Earning Management of Listed Companies: Evidence from China

This paper explores the relevance of anticipated tax reduction and the earning management motivated by tax saving in Chinese listed companies. Empirical results present that firms with anticipation of tax reduction make use of earning management, including delaying sales, taking unusual income-decreasing discretionary accruals and so on, to report lower income in the higher tax rate period, which shows the improvement in tax planning. While knowing that tax rate will be falling, private enterprises take more earning management in the higher tax rate period than state-owned enterprises (SOEs), indicating the ownership of the firm has effect on the extent of earning management. Besides, the motivation of earning management in the higher tax rate period is counteracted by the previous net losses(NLs).