Dividends and tax avoidance as drivers of earnings management: Evidence from dividend-paying private SMEs in Finland

Karjalainen, Jussi; Kasanen, Eero; Kinnunen, Juha; Niskanen, Jyrki

doi:10.1080/00472778.2020.1824526

Cited by 23 publications

(16 citation statements)

References 54 publications

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“…How is the aggregate effect of tax avoidance and the tax risk on earnings quality, financial reporting quality, and firm disclosure? Karjalainen et al (2020) find that tax avoidance is a determinant for earnings management. In addition, Jackson (2015) concludes that earnings management and tax avoidance impact the association between book-tax-differences and future earnings changes.…”

Section: Accounting and Auditingmentioning

confidence: 95%

Corporate tax risk: a literature review and future research directions

Saragih

Ali

2021

Manag Rev Q

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Our study aims to analyze the current state of, and avenues for, future studies into the tax risk literature. The construct of the corporate tax risk (tax uncertainty) has increasingly begun to attract significant interest from both academics and practitioners. Most previous studies discussing corporate tax behavior have also focused on tax planning, tax avoidance, and tax evasion. Studies investigating the tax risk are still very limited and it is an underexplored subject. Examining the tax risk is crucial because it relates to the tax outcomes arising from a firm's taxation activities. Furthermore, analyzing the tax risk simultaneously with other tax behavior constructs may provide a deeper understanding. Despite the importance of the tax risk construct, there is no published literature review regarding the tax risk. Using a systematic review process, this study selected 37 articles published in 21 highly reputable journals listed in the Scopus database. The findings of this study are provided in two sections: (1) A discussion of the current studies of tax risk, including the theories, methods, and measurements of tax risk, its determinants and consequences; and (2) Recommendations for future research agendas. From the review, we find that tax risk research still tends to be limited and understudied; many relevant research gaps can be identified. Finally, we suggest several research directions into 12 themes: corporate governance, executive personal characteristics, executive compensation plans, ownership structure, firm-level characteristics, the external market, institutional factor, accounting and auditing, operating environment, regulators and regulation, reputational costs, and others.

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Section: Accounting and Auditingmentioning

confidence: 95%

Corporate tax risk: a literature review and future research directions

Saragih

Ali

2021

Manag Rev Q

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“…Hanlon (2005) and Blaylock et al (2012) find empirical evidence that entities with higher taxable deferred taxes resulting from differences between book and taxable income, together with lower earnings persistence, tend to be a sign that they are engaged in earnings management activities to avoid paying taxes. For SMEs in Finland, Karjalainen et al (2023) argue that their contribution to the previous literature consists of providing empirical evidence of dividend and tax-driven earnings management. In the case of Portuguese SMEs, Pereira et al (2023) find empirical evidence that deductible temporary differences are an indicator of earnings management activities, given that earning persistence tends to be lower when deductible temporary differences increase.…”

Section: Impact Of Debt and Taxes On Earnings Persistence Of Portugue...mentioning

confidence: 99%

Impact of debt and taxes on earnings persistence of Portuguese SMEs

Pereira¹,

Gomes²,

Lima³

2023

RBGN

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Purpose -We analyze how debt burden and income taxes affect the earnings quality of Portuguese SMEs, using earnings persistence as a proxy for earnings quality. More specifically, we intend to find out whether the high indebtedness of these firms causes a greater tax effect than debt effect.Theoretical framework -While credit banks represent the main source of financing for SMEs, they tend to reduce their earnings in order to avoid taxes. However, this activity can be costly for their development, given that banking institutions demand earnings persistence to reduce the risk of default, in accordance with contract theory.Design/methodology/approach -We collect data for 140 Portuguese SMEs over the period from 2015 to 2021 to run panel data regressions.Findings -Debt and earnings persistence are negatively related, so this relationship tends to degrade earnings quality, which is inconsistent with capturing bank confidence. Furthermore, debt maintains the negative effect with income taxes in the model. However, in this combination, income taxes become significant to explain the negative influence on earnings persistence, which is consistent with tax avoidance. Finally, we control for firm size, which is positively associated with earnings persistence. Overall, taking together the determinants of debt, income tax and size, Portuguese SMEs do not have persistent earnings.Practical & social implications of research -This study may be useful for several stakeholders of Portuguese SMEs, namely tax authorities, creditors, managers and academics, as it shows that debt and especially taxes have a negative impact on the earnings persistence, which signals a decrease in the quality of financial reporting.Originality/value -In the most leveraged Portuguese SMEs, debt is not a governance mechanism to control managers' decisions, as more debt reduces earnings persistence, meaning that managers are not sensitive to capturing creditors' confidence. In addition, the tax effect is more relevant than the debt effect for earnings persistence. Faced with interest rate rigidity, managers exploit the discretionary nature of tax decisions.

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“…Unlisted companies have a greater concentration of capital (De Massis et al, 2013), and in theory, minority interests are less relevant, as these companies do not suffer the pressures of the capital market, associated with the price of shares that motivate greater capital dividends distributions (Michiels et al, 2015). The major shareholder normally occupies management positions in the company (De Massis et al, 2013), having more information about the business than other investors, which can lead to greater information asymmetries (Karjalainen et al, 2020). On the other hand, governance bodies will be potentially more fragile, not being effective in defending minority interests, either because of less legal protection for the investor or because these companies are not subject to similar rules to those of the capital market (Michiels et al, 2015).…”

Section: Theoretical Fundamentals and Investigation Hypothesismentioning

confidence: 99%

Determinants of Dividend Payout in Unlisted Spanish Family and Non-Family Firms

Borralho¹,

Duarte²

2022

EJFB

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The present study analyzes dividends paid in unlisted family and non-family businesses, exploring factors that lead to higher or lower dividend payments. Data from 612 Spanish companies during 12 consecutive years was analyzed. This study indicates that family businesses, as a result of the greater proximity of the family to the business, pay lower dividends. However, we found evidence of higher dividends paid in pyramid structures, susceptible to higher agency costs, both in family and non-family businesses. In family businesses, this can be explained by their aim to maintain levels of trust with minority interests, and in non-family businesses by the purpose to mitigate conflicts of interest as a consequence of greater autonomy of subsidiaries. The evidence obtained adds value to the investigation, which has generally been focused on listed companies. Considering that unlisted companies use the dividend policy to align divergent interests, especially in more fragile governance structures, the results contribute to reduce the gap in research, and have practical implications for companies and investors.

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Dividends and tax avoidance as drivers of earnings management: Evidence from dividend-paying private SMEs in Finland

Cited by 23 publications

References 54 publications

Corporate tax risk: a literature review and future research directions

Corporate tax risk: a literature review and future research directions

Impact of debt and taxes on earnings persistence of Portuguese SMEs

Determinants of Dividend Payout in Unlisted Spanish Family and Non-Family Firms

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