Tax authority independence and earnings management

Abstract

This study investigates how tax authority independence affects corporate earnings management. We employ a difference-in-differences approach and find that increased tax authority independence significantly reduces earnings management, particularly for firms engaging in downward earnings management. Additionally, we observe that this negative correlation is influenced by factors such as ownership structure, political connections, audit quality, and legal environment. Furthermore, we demonstrate that enhanced tax enforcement and corporate governance serve as channels through which the independence of tax authorities mitigates earnings manipulation.