Earning management and corporate tax rate change: Evidence from the Finnish 2005 tax reform

The Finnish 2005 tax reform included, among other things, a reduction of the corporate tax rate from 29% to 26% and a partial taxation of dividends. The reduction in the corporate tax rate created a strong incentive for the firms to shift earnings from the period prior to the tax reform to the period after the tax reform. There are a number of previous studies where the results are unambiguous in that firms manage their earnings downwards prior to a decrease in the corporate tax rate. The results in this study suggests that firms that do not pay dividends in the year prior to the tax reform engage in income decreasing earnings management prior to the tax reform and that the earnings management reverses the year after the tax reform. For the firms that have paid dividends in the year prior to the tax reform there is only weak evidence of similar earnings management behavior as for the firms that have not paid
dividends.