Earnings and balance-sheet properties and the interplay of tax incentives and tax enforcement

This paper analyses the joint association of tax incentives and tax law enforcement strictness on private firms' earnings and balance sheet properties. It answers a call for additional research on why "here is (…) substantial within-country variation in managers' incentives to [manage] earnings" [LaFond et al., (2007), p.14]. There is evidence that tax laws in practice are enacted to a different extent within a country's homogenous legal framework. The key results are that stricter tax law enforcement impairs managers' ability or willingness to engage in income-decreasing accrual earnings management. On the downside, managers instead seem to resort to real earnings management choices which are associated with potentially negative long-term real business impact but generally covered by the business judgement rule.