Tax Management and Earnings Management in Business Groups

Abstract

The aim of this research was to investigate the relationship between tax management and earnings management in business groups in the companies listed in the Tehran Stock Exchange, (TSE). To test the study hypotheses, the multiple linear regression model was used. The results from 126 companies listed in the TSE in the period 2007 to 2014 showed that there exists a significant negative relationship between earnings management and tax management. Findings of this study indicated that the firms in business groups, compared with independent firms, concentrate on management of their earnings, more. Also, firms in diversified business groups, compared with independent firms, have more earnings management. Moreover, it seems that the increase in ownership share in main company in subsidiary results in more earnings management. With regard to motivation for earnings management, the results indicated that strategic earnings management in business groups, diversified and non-diversified, is in response to tax incentives. In particular, it seems that discretionary accruals in firms in business groups significantly depends on the effective tax rate. Finally, the results showed that earnings management are carried out specifically through the intra-group transactions.

Keywords

• earnings management
• business groups
• tax management
• effective tax rate