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The effect of earnings management and tax aggressiveness on shareholder wealth and stock price crash risk of German companies

47 citations0/0 files storedJournal of Applied Accounting Research

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Auditing, Earnings Management, Governance Corporate Taxation and Avoidance Corporate Governance and Financial Management

Abstract

Purpose The purpose of this paper is to examine the influence of earnings management (EM) and tax aggressiveness (TA) on shareholder wealth and on stock price crash risk (SPCR) of German companies. Design/methodology/approach The sample comprises 820 firm-year observations of 188 non-financial companies listed on German stock exchanges from 2008 to 2014. The authors apply generalized least square panel regression to overcome autocorrelation and heteroscedasticity problems. Findings EM and TA are not related in terms of affecting shareholder wealth and SPCR. EM has no impact on shareholder wealth but significantly affects SPCR. TA has a significant positive effect on shareholder wealth but no impact on SPCR. Thus, EM practices applied within German companies are non-opportunistic, as they do not affect shareholder wealth and decrease SPCR. TA practices are also non-opportunistic, as they increase shareholder wealth and do not affect SPCR. Research limitations/implications This study provides insights that can improve managers’ accounting choices (EM vs TA) and alleviate investor concerns about the effect of managers’ manipulation strategies. Considering other variables affecting TA, such as discretionary book tax differences, may add further insights into this discussion. The analysis of and comparison with other markets may shed more light on the validity and generalizability of the results. Practical implications This study recommends that investors must take into consideration the accounting variables to ensure better investment decisions and highlight the importance of CEO choices on market reaction. Originality/value The investigation of the mutual impact of EM and TA on shareholder wealth and SPCR is novel, and so too is the analysis of whether EM and TA are complementary or substitute for each other in this relationship.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1998Principles and Practice of Structural Equation Modeling 1986Large Shareholders and Corporate Control 2005Performance matched discretionary accrual measures 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 1968THE PERFORMANCE OF MUTUAL FUNDS IN THE PERIOD 1945–1964 1997An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud

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2021CEO compensation, CEO attributes and tax aggressiveness: evidence from French firms listed on the CAC 40 2022Micro-, meso- and macro-level determinants of stock price crash risk: a systematic survey of literature 2021Financial accounting for deferred taxes: a systematic review of empirical evidence 2024Nexus between profitability, firm size and leverage and tax avoidance: evidence from an emerging economy 2019CEO characteristics, accounting opacity and stock price synchronicity: Empirical evidence from German listed firms

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