The Hypothesis of Avoiding Losses and Decreasing Earnings Through Tax Expense
Laura Parte Esteban
Mª Carmen Gonzalo Angulo
José Antonio Gonzalo Angulo
In the first part of this paper, we examine whether there is a discontinuity at zero (i.e., a “kink”) in the distribution of profits and increases of profits. Second, we investigated the effect that the recognition of tax expenses generates in the distribution of earnings. Beaver, McNichols and Nelson (2007) have defended that the observed discontinuity in earnings couldn’t be enough to confirm the manipulation of results by management. In contrast, they argue that the observed discontinuity in earnings could be due to the asymmetric effect from two particular items: the tax expense and the special items (because the different way to recognizing income and expenses, due to the bias induced by the accounting principle of conservatism). In the Spanish context, the empirical evidence supports the thesis of Beaver, McNichols and Nelson (2007) for the period 1996-2000. However this hypothesis relaxes from exercise 2001, in agreement with the carried out fiscal reform in 2001.
earnings management, decreases in earnings, loss in earnings, tax expense
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