Corporate income tax planning through real earnings management: Empirical evidence from Thailand

Abstract

This empirical research investigates the association between corporate income tax planning and real earnings management of listed companies in Thailand. It also examines the influences of firms’ multinational characteristic and tax loss carryforwards on the association between corporate income tax planning and real earnings management. The research samples are listed companies in the Stock of Exchange of Thailand (SET) during the period of 2011- 2014. In this research, corporate income tax planning is defined as the ability to lower the corporate income tax expenses without reducing the book income. Specifically, four real earnings management activities are explored: sales manipulation, overproduction, discretionary expenses reduction and the timing of asset sales. The research findings indicate the association between corporate income tax planning and real earnings management in which firms that engage in real earnings management to manipulate the income upward would undertake corporate income tax planning to mitigate the additional corporate income tax subsequent to the incremental income. The association between both variables is also found in the multinational firms that engage in real earnings management through the production and discretionary expenses cut manipulations; and in firms with tax loss carryforwards engaging in real earnings management through overproduction, discretionary expenses reduction and asset sales manipulation. The results remain unchanged with the robustness tests. Overall, this research is expected to provide an insight into multinational firms and firms with tax loss carryforwards with regard to corporate income tax planning and real earnings management; and also to contribute to more informed decision-making of investors who rely on the financial reports. Most importantly, it is hoped that the research findings would bring about change in the current tax law so as to discourage or minimize the exploitation of regulatory loopholes through corporate income tax planning.