Management of accrual components in response to corporate income tax rate changes: Evidence from Korea

Won Wook Choi, Hyun Ah Lee

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

Changes in the statutory corporate income tax rate provide firms with an opportunity to reduce their tax burden by shifting their taxable income from higher to lower tax rate years. One negative consequence of shifting taxable income across years is higher variation in book income for financial reporting purposes. Taxable income and book income are closely related in most countries, and, in general, reporting volatile book income across years is not a favorable signal to investors. This study investigates how firms shift taxable income and concurrently mitigate book income fluctuation by managing accrual components separately when the statutory income tax rate changes. Unlike prior studies, we decompose discretionary accruals into two components and examine distinctive patterns of accrual management in Korea, where book-tax conformity is high and aggressive tax avoidance is restricted. We find that firms manage book-tax accruals for taxable income shifting and manage book-only accruals to mitigate book income fluctuation. Furthermore, we find the extent of book-tax and book-only accruals management varies depending on the firms' tax and financial reporting costs. The results of this study provide clear and compelling evidence of firms' opportunistic accrual management behavior in response to statutory tax rate reduction.

Original languageEnglish
Pages (from-to)1421-1436
Number of pages16
JournalJournal of Applied Business Research
Volume29
Issue number5
Publication statusPublished - 2013 Sep 1

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Taxable income
Korea
Tax rate
Corporate income tax
Income
Tax
Accruals
Fluctuations
Financial reporting
Tax avoidance
Income tax
Conformity
Discretionary accruals
Income shifting
Tax burden
Investors
Costs

All Science Journal Classification (ASJC) codes

  • Business and International Management

Cite this

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Management of accrual components in response to corporate income tax rate changes : Evidence from Korea. / Choi, Won Wook; Lee, Hyun Ah.

In: Journal of Applied Business Research, Vol. 29, No. 5, 01.09.2013, p. 1421-1436.

Research output: Contribution to journalArticle

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