New publication in the Review of Accounting Studies
In a new study published in the Review of Accounting Studies, Max Pflitsch from the Chair of International Business Taxation, together with co-authors from the Wisconsin School of Business and the Technical University of Munich, examines how companies respond to the reduction in the U.S. corporate tax rate. The study focuses on the extent to which firms use different forms of earnings management to address tax and financial reporting incentives simultaneously.
The results show that firms increasingly use real economic actions (real activities manipulation) to shift taxable income from the period before the tax reform to the lower-tax period following the reform. In total, the firms in the sample save between 9.1 and11.0 billion in taxes through this income shifting.
At the same time, the study finds evidence that firms use accrual-based earnings management to report higher book income during the high-tax period, thereby mitigating the negative effects of tax-motivated income shifting on financial reporting.