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Tax-induced earnings management within a dividend imputation system


This study examines whether, under a full dividend imputation system, companies defer income until tax changes beneficial to shareholders take effect. Using a sample of Australian listed companies, we find that companies manage earnings downwards via discretionary current accruals in the year preceding a reduction in personal income tax rates, and in the year preceding a change in the tax status of superannuation funds, which reverse the first year both changes operate in unison. We also examine whether such earnings management is a function of a company’s ownership structure and dividend payout policy. We find a company’s earnings management varies according to the proportion of shares held by superannuation funds, consistent with superannuation funds, as an investor-type, benefitting most from income deferral.

We also find income deferral is more likely for dividend-paying firms, consistent with the deferral of dividends and the deferral of income being alternative ways to exploit shareholder-level tax changes to enhance shareholder wealth. Our results are informative of the likely behaviour of companies should recent recommendations for reduced personal tax rates be implemented.

Author profiles

Dean is a Lecturer in the Department of Accounting and Finance, Monash University.
Current at 1 September 2013
Click here to expand/collapse more articles by Dean HANLON.
Balasingham Balachandran
Balasingham works in the Department of Finance for La Trobe University.
Current at 1 October 2013
Hanghang Tu
Candice recently taught undergraduate financial accounting at UNSW.
  • Current at 1 September 2013

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