Empirical Evidence on Reduced Tax Burden and Earnings Management within Malaysian Companies: Introducing Tax Incentive-Recipient Firms as Moderating Factor


Mohd Ali, Salsiah and Norhashim, Mariati and Jaffar, Nahariah (2022) Empirical Evidence on Reduced Tax Burden and Earnings Management within Malaysian Companies: Introducing Tax Incentive-Recipient Firms as Moderating Factor. In: Postgraduate Social Science Colloquium 2022, 1 - 2 June 2022, Online.

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This study examines how tax avoidance (measured by effective tax rate, ETRs) affects the level of its associated costs of reporting quality (measured by earnings management) and if firms with tax incentives may affect the reporting quality differently. Further this study also examine how these constructs interact to affect the level of reporting quality. Tax incentives are an important instrument for governments to spur economic growth. At the firm’s level, reduced in tax burden is expected to be able to promote both firm value and sustainability enhancement from the tax saving-cash generated allowing for further business expansion. Further, since the potential cost and benefits of tax avoidance practice may vary throughout the spectrum of tax avoidance, i.e, from one end to the other end, and in each level of practices, it may create and/or supported by different reporting incentives. This situation therefore is expected to create different incentives in accounting reporting. In one end, tax avoidance may just involve business routine expenses that reduces tax expenditure, together with tax incentives utilisation, ranging to take those practices that took advantage from any tax code loopholes, and at the other end, to more extreme tax avoidance /tax evasion practice. Despite this concern and limitation, prior study however are unable to yet methodologically (1) captured the precise tax avoidance measures and (2) unable to precisely separate between routine business transaction (including tax incentive utilisation). On the other words, if the variation in those measures (ETRs) include the variation due to economic factors (such as loss history) or tax avoidance will eventually value-added practices or a harmful exercise affecting at many level, from investors, to government itself is still partially unknown. This study is not only addressing the issue how to better capture if tax avoidance incentives in affecting reporting incentive, but also, addressing issues of; if those firms that have been successfully granted with tax incentive ( as to isolated level of tax avoidance practices), will possibly affect the way earnings is managed in different way. As the information of tax incentives recipients are usually invisible, prior studies are always unable to examine the effectiveness of the tax incentives. Therefore, it is very difficult for the regulators to examine the impact of various tax reform effects on the company’s performance, as one of the measures to evaluate the effectiveness of certain tax policies. The reasons are two folds. First, methodologically, it is difficult to see the impact of various tax avoidance practice (inclusive tax incentives utilisation) due to lack of tax information transparencies made by the firm. Second, the quality of reporting as a platform to evaluate the impact of tax avoidance practice on companies’ performance are always impaired by tax related reporting incentives Thus, this study attempts to reduce this limitation by introducing firms granted with tax incentives as moderating factor to see if there is significant differences in the manner it will affecting the reporting quality. Fully understanding of all those above-mentioned issues, this study attempts to mitigate those limitation by taking advantage from the existence of favored industries (high incentive-recipients) as well as the availability of tax incentive recipient companies in Malaysia. The existence of tax incentive recipient firms serves as a platform for this study to examine if magnitude of earnings management exercise is significantly different between these two setting (high and lower tax incentives recipient groups) due to different motivation drive related to tax policy. The contribution of this study is twofold. First, to suggest that tax avoidance and tax incentive should be considered jointly to better examine the way tax avoidance may affect the earnings manipulation. Secondly, this study will provide an alternative measure of tax incentives effectiveness, ie, from the perspective of the financial reporting quality This study contributes to the enrichment in existing body of knowledge, in regards to developing countries setting. Many studies have been done, particularly in the consideration of developed countries as little empirical evidence about the impact of tax incentives on investment in developing countries. Thus, this study will take the opportunity to enrich the existing knowledge within developing countries perspective. . Broadly, our findings provide new evidence on how taxes affect the reporting quality and suggest that tax avoidance and tax incentives recipient status should be considered jointly and not separately examined. Thus, the policy maker may consider aggressive campaign and ways to ease the whole process, should the firms be granted and actually benefit from tax incentives, allowing firm to enhance its firm’s value and sustainability.

Item Type: Conference or Workshop Item (Paper)
Uncontrolled Keywords: tax avoidance, earnings management, Effective Tax Rate (ETR), Tax incentive
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD4801-8943 Labor. Work. Working class > HD7795-8027 Labor policy. Labor and the state
Divisions: Faculty of Management (FOM)
Depositing User: Ms Suzilawati Abu Samah
Date Deposited: 15 Aug 2022 03:05
Last Modified: 19 Aug 2022 07:46
URII: http://shdl.mmu.edu.my/id/eprint/10389


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