International Journal of Economy, Management and Social Sciences, 2(10) October 2013, Pages: 854-858

TI Journals

International Journal of Economy, Management and Social Sciences

ISSN
2306-7276

www.tijournals.com

Empirical Research on the Relationship between Earnings

Quality and Tax Policies of Companies
Mohammadreza Abdoli 1, Aliasghar Mahmoudzadeh 2, Hamid Panahi 3
1,2,3

Department of Accounting, Shahrood Branch, Islamic Azad University, Shahrood, Iran.

AR TIC LE INF O
Keywords:
Tax policies
Earnings persistence

AB STR AC T
This research is aimed at studying the relationship between the earning quality of companies and
the tax policies adopted by them. The statistical population for the research included 130
companies recognized by the Tehran Stock Exchange. The accounts of the selected companies
from 2008 to 2012 were studied and the simple linear regression model and the logistic regression
model were also used to examine the research assumptions. In this research, the tax policies of the
selected companies were analyzed by identifying the differences between the declared tax and
assessed tax figures as well as studying the relationship between tax provision deficit and earnings
persistence. The results of the research indicated that a bigger difference between declared tax and
assessed tax leads to a lower earnings persistence in companies. Moreover, in companies whose tax
provision deficit is reported by an independent auditor, earnings persistence is lower. Therefore,
companies with aggressive tax policies and tax files submitted to tax conciliation boards on an
annual basis have a lower earning quality, which can be considered a disadvantage by investors
assessing the performance of the company.
2013 Int. j. econ. manag. soc. sci. All rights reserved for TI Journals.

1.

Introduction

Tax is an incentive for corporations to make decisions. Recent studies suggest that the administrative behaviors and deeds aimed for
minimizing corporation taxes by means of aggressive tax measures (which are commonly practiced in many countries) are becoming part of
the mainstream characteristics to companies. However, taxes resulted from aggressive activities pose considerable costs and interests to the
management, shareholders, and the entire society [8].
Tax aggressiveness is as old as the notion of tax because it has been under discussion since the introduction of this notion. Therefore, tax
aggressiveness is of great importance to all countries.
Tax imposed on corporation income is a factor causing cash outs in companies and reducing earnings of their shareholders. Therefore,
analysis of factors influencing the kinds of policies adopted by companies is of considerable importance to shareholders and governments.

2.

Research Background

Results of the research by Benjamin et al. (2011) suggest that companies with more stable tax strategies demonstrate a higher rate of
earnings persistence [4].
Atwood and Drake (2010) also concluded that higher consistency between accounting profits and tax base earnings adds to the quality of
earnings and undermines earnings persistence [3].
Linda & Chen (2012) indicated that the relationship of tax policies and earnings management with earnings persistence is significant and
that it affects information content of earnings as well [6].
Lenis & Richardson (2011) showed that if more foreign members hold seats in the boards of directors of companies, the share of aggressive
tax policies and tax saving behaviors will be reduced. The least regression squares resulted from the cross-sectional analysis of 401
companies, confirm the criticality of the analysis and the importance of both the arrangement of the board of directors and aggressive tax
policies [5].
Abdoli & Bakhshi (2013) conducted a series of researches on the factors underlying aggressive tax policies. Results of their studies
indicated that the size of a company does not leave a significant effect on the tax policies adopted by them. Moreover, they found out that
the age of a company is significantly related to its tax policies. However, their researches did not confirm a relationship between the
arrangement of the board of shareholders and the type of adopted tax policies [1].
* Corresponding author.
Email address:Mra830@yahoo.com

Empirical Research on the Relationship between Earnings Quality and Tax Policies of Companies

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Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(10) October 2013

Moshki & Nurdideh studied the impact of earnings management on earnings persistence. Results showed that earnings persistence of
companies which had income smoothing is more than companies which didnt have income smoothing. Results also demonstrated that
income smoothing companies in comparison with other companies will declare more stable earnings per share (EPS) [7].
Shamsi Jaamkhaneh (2009) assessed the causes of the difference between declared taxable income and assessed taxable income of
companies and concluded that the difference between the two is significant. In addition, she found out that each of the factors influencing
the difference were significant at the specified level of confidence [9].
Abdoli & Talebnia (2013) studied the factors contributing to the reduction in the difference between declared tax and assessed tax figures.
The sample under study included 130 companies recognized by the Tehran Stock Exchange from 2007 to 2011. The results of this study
show that there is a significant difference between the declared tax and assessed tax of companies with varied ownerships or companies
with tax provision deficit. Furthermore, the difference between the declared tax and assessed tax of income smoothing and non-smoothing
companies was also found to be significant [2].

3.

Research Hypotheses

To achieve the research objective the following hypotheses were formulated:

12-

4.

There is a bigger difference between the declared tax and assessed tax of companies with lower earnings persistence.
Companies with lower earnings persistence demonstrate the tax provision deficit record in their auditing reports.

Research Model

The following equation is used to examine the assumption using the logistic linear regression model:

Where:
Pi= possibility of the inclusion of tax provision deficit record in the auditing report of the i-th company
Ci= earnings sustainability in the i-th company
Sizei= average size of the i-th company
CVearni= coefficient of variations of earnings for the i-th company
The second assumption is also examined using the linear regression model as follows:

Where:
Ci= earnings sustainability in the i-th company
Sizei= average size of the i-th company
CVearni= coefficient of variations of earnings for the i-th company

5.

Methodology

This study is an applied research in terms of the objectives and is an analytical-descriptive research in terms of approach. This study is also
a causal research because it applies precedent data. This study uses simple linear regression and the logistic regression in order to fit the
models. To study the normality of the regression model, variance analysis and in order to check the significance of each variable coefficient
in the model, residuals figure is used.

6.

Statistical population and sampling

Companies, which were recognized by the Tehran Stock Exchange, had their fiscal year ended to March 2014, and had available
information, formed the statistical population. However, investment companies, banks, and insurance companies were excluded from the
study. Sampling was performed using the systematic removal sampling method according to the following criteria. Due to the restrictions a
total of 130 companies were selected.

7.

Dependent variable and its measurement

The research dependent variable is tax policies (TP), which can be studied as follows:
Inclusion of the tax provision deficit record in the independent auditors report: Companies with the tax provision deficit record in their
reports of one year were assigned number 1 and companies without it were assigned number 0.
The difference between declared tax and assessed tax: The difference between the tax declared by companies in their tax returns and the tax
assessed by auditors was identified and confirmed by the Department of Finance.

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Int ernational Journal of Economy, Mana ge ment and Soci a l Sci ences, 2(10) October 2013

8.

Independent variable and its measurement

The research independent variable is earnings persistence of companies in the time period under study. Earnings were measured using a
single-variant regression model which takes current period earnings as a function of previous periods earnings. In other words, this model
takes going earnings as a proof of earnings persistence. This model was developed by Decho and Dicho in 2002.

Earni ,t 0 1earni ,t 1 i ,t
Where:
EARN i,t= current period earnings except for extraordinary items
EARN i, t-1 = previous period earnings except for extraordinary items
i,t= remainder of the regression model
Tests were performed for all of the research years based on data obtained from sample companies. 1 (Independent variable coefficient)
stands for earnings persistence in the course of the research period.

9.

Control variable and its measurement

Company size: It is obtained by taking the logarithm of asset book value of company j in year t:
SIZE i, t = Log (ASSETBVJ, t)
Earnings coefficient of variation: It is used in this research as an indicator of corporation operational risk. It is in fact equal to the ratio of
standard deviation to mean earnings of year t-3 to t.
C.Vi, t = (E) / X (E)

10. Results and Discussion

Descriptive Statistics of the Data:
Mean, standard deviation, minimum and maximum for each of the quantitative variables are provided in the table below:
Table 1. Statistics of studys values for quantitative variables

3747006
357832
57700
90841
33852
0.362

Standard
deviation
21046842
1344207
229774
363351
141453
0.233

13.926
1.359
0.257

1.222
6.831
0.867

Mean
Total Assets
Income
Declared Tax
Assessed Tax
Difference between Declared and Assessed Tax
The ratio of difference between Declared and Assessed tax to
Assessed tax
Logarithm of total assets
Coefficient of Variations of Earnings
Earnings Persistence

Minimum

Maximum

Skewness

Kurtosis

18425
-1098702
0
9
3
0.008

342254718
15706325
2022020
3337528
1315508
1.000

12.35
7.09
6.91
6.99
6.94
0.570

174.17
59.57
52.05
55.16
55.57
-0.592

11.585
-9.843
-4.045

18.843
62.982
3.924

1.193
7.192
-0.912

1.994
59.038
8.304

Results of Hypothesis:
H1: There is a bigger difference between the declared tax and assessed tax of companies with lower earnings persistence.
In order to study the assumption, the following model was applied to it and the regression line of the model was fitted to it.

Table2.Regression Results of declared tax and assessed tax with earnings persistence

Model
Error
Total

Degree of Freedom
3.000
126.000
129.000

Test of Significance
Total Squares
Mean of Squares
0.046
0.015
4.920
0.039
4.965

F-value
0.389

P-value
0.761

Empirical Research on the Relationship between Earnings Quality and Tax Policies of Companies

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Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(10) October 2013

Table3. Estimation of parameters

(Constant)
C
Size
CV

Estimation
0.583
-0.009
0.001
0.003

Standard deviation
0.203
0.020
0.015
0.003

T_value
2.876
-0.422
0.052
0.988

P_value
0.005
0.673
0.958
0.325

According to the table, which contains the results of the analysis of variance, this model is not statistically significant. It can also only
predict less than 1% of the variations of the dependent variable. According to this finding, increase in the earnings sustainability leads to a
decrease in the difference between declared tax and assess tax. In addition, based on the probability of (p=0.673) it can be concluded
that the earnings persistence is a significant variable whose decrease leads to an increase in the difference between declared tax and assess
tax. The final model is written as follows:
1

TAGi 0.583 0.009Ci 0.001Sizei 0.003CVerani

Therefore, the first research assumption is proved based on the probability of the model and its coefficients. Hence, it can be said that there
is a bigger difference between the declared tax and assessed tax of companies with lower earnings persistence.
H2: Companies with lower earnings persistence demonstrate the tax provision deficit record in the auditors reports.
In order to study the assumption, the following model was applied to it and the regression line of the model was fitted to it.

Table4. Test of Model Significance

Chi-square
2.447

Degree of Freedom
3.000

P-value
0.485

Table5. Estimation of parameters

variable
C
SIZE
CV
Constant

parameter
-0.093
0.244
-0.034
-2.010

Standard deviation
0.253
0.202
0.027
2.765

Wald
0.135
1.468
1.570
0.528

Degree of Freedom
1.000
1.000
1.000
1.000

p-value
0.713
0.226
0.210
0.467

Although the coefficients presented in the above table reflect a reduction in the probability of the inclusion of the tax provision deficit
record in the auditors reports and an increase in earnings persistence, the model and its coefficient are not statistically significant. The final
model is also written as follows:

Therefore, the second assumption is also proved based on the probability of the model and its coefficients. Hence, it can be said that
companies with lower earnings persistence demonstrate the tax provision deficit record in the auditors reports.

11. Conclusions
Business income is one of the items included in financial statements and is of great significance to all of the users of these documents. Due
to the importance of corporation income to the users of financial statements, managements try to manipulate the figures of corporation
income and change the means used to declare it. This manipulation finally brings about a disorganized and unsustainable declaration of
earnings. One of the ways to manipulate income figures is to adopt aggressive tax policies, which are adopted by managements by using
their powers in accrual accounting. They take measures for reducing or manipulating corporation income and consequently decreasing
taxes imposed on their business.
Based on the results of the examination of the first assumption it can be argued that the bigger the difference between declared tax and
assessed tax figures, the lower the sustainability of earnings will be. Accordingly, tax policies can be known as one of the administrative
means of smoothing income because managers sometimes try to manipulate earnings data and taking tax measures to demonstrate a
sustainable rate of earnings.
Based on the results of the examination of the second assumption it can also be argued that companies with the tax provision deficit
record in their auditing reports lack sustainable earnings. Therefore, companies with low earning qualities are usually involved with tax
problems and vague financial statements.

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Int ernational Journal of Economy, Mana ge ment and Soci a l Sci ences, 2(10) October 2013

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