Regional tax compliance and tax motivated earnings management: evidence from the 2008 Italian tax reform

Abstract

Using a large sample of public and private Italian companies, I investigate whether regional tax compliance affects earnings management activity in response to a decrease in the corporate tax rate. I find evidence that the higher the regional tax compliance where the company is based, the less managers engage in tax motivated earnings management. On the other hand, empirical results do not support the hypothesis that companies with an audit committee manage their earnings less in order to reduce their tax burden. Further analyses, however, show that the presence of an audit committee is relevant when interacted with the regional tax compliance. The impact of regional tax compliance on tax motivated earnings management declines when a company has an audit committee and this suggests a substitution effect between internal and external monitoring mechanisms. Finally, sensitivity tests show that both the intensity of earnings management for tax purposes and the effect of regional tax compliance are more material for small firms

How Do Italian Private Companies Respond to a Reduction in the Corporate Standard Tax Rate? A Focus on the Ownership Gender Diversity Effect

“…Thus, research hypothesis H1 is confirmed, consistent with the findings of previous studies (e.g. Watrin et al, International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019 2012; Lin et al, 2014;Mattei, 2014a;Mattei, 2014b;Sundvik, 2016;Höglund & Sundvik, 2016;Sundvik, 2017a;Sundvik, 2017b;Sundvik, 2017c;Dobbins et al, 2018;Haga et al, 2019).…”

“…As specifically concerns the Italian setting, Mattei (2014a) and Mattei (2014b) investigated the phenomenon under consideration with reference to a previous corporate standard tax rate cut (2008). They found that private companies shifted earnings from FY 2007 to FY 2008, thus managing their earnings.…”

“…9, No. 4 Maydew, 1997;Lopez et al, 1998;Roubi & Richardson, 1998;Lin et al, 2012;Watrin et al, 2012;Lin et al, 2014;Mattei, 2014a;Mattei, 2014b;Sundvik, 2016;Höglund & Sundvik, 2016;Sundvik, 2017a;Sundvik, 2017b;Sundvik, 2017c;Dobbins et al, 2018;Haga et al, 2019). In a recent review of the literature, Sundvik (2017a) found that this phenomenon has been underexplored in private companies, despite their importance in many countries around the world.…”