Tax Management and Earnings Management in Business Groups

Document Type : Research Paper



The aim of this research was to investigate the relationship between tax management and earnings management in business groups in the companies listed in the Tehran Stock Exchange, (TSE). To test the study hypotheses, the multiple linear regression model was used. The results from 126 companies listed in the TSE in the period 2007 to 2014 showed that there exists a significant negative relationship between earnings management and tax management.
Findings of this study indicated that the firms in business groups, compared with independent firms, concentrate on management of their earnings, more. Also, firms in diversified business groups, compared with independent firms, have more earnings management. Moreover, it seems that the increase in ownership share in main company in subsidiary results in more earnings management. With regard to motivation for earnings management, the results indicated that strategic earnings management in business groups, diversified and non-diversified, is in response to tax incentives. In particular, it seems that discretionary accruals in firms in business groups significantly depends on the effective tax rate. Finally, the results showed that earnings management are carried out specifically through the intra-group transactions.


Aghaei, A. (2001). Examine the tax exemption in agricultural sectors in Iran, Tehran, Ministry of Economic Affairs and Finance, Department of Economic Affairs [In Persian].
Aflatooni, A., Nikbakht, L. (2010). Application of econometrics in accounting research. Financial Management and Economic Sciences, Termeh Publishers, First Edition [In Persian].
Beuselinck, C., Deloof, M. (2007). Business groups, tax and accruals management, Discussion Paper, Tilburg University, 46, 1-43.
Bena, J., Ortiz-Molina, H. (2013). Pyramidal ownership and the creation of new firms. Journal of Financial Economics, 108(3), 798-821.
Beuselinck, C., Deloof, M. (2014). Earnings management in business groups: Tax incentives or expropriation concealment? The International Journal of Accounting, 49, 27-52.
Dechow, P., Sloan, G., Sweeney, A. (1995). Detecting earnings management. The Accounting Review, 70(2), 193-225.
Gopalan, R., Nanda, V., Seru, A. (2007). Affiliated firms and financial support: Evidence from Indian business groups. Journal of Financial Economics, 86, 759-795.
Graham, J., Tucker, A. (2006). Tax shelters and corporate debt policy. Journal of Financial and Economic, 81, 563-594.
Hassani, M., Shafei, S. (2010). Estimation of the effective tax rate on business fundamentals and legal persons. Tax Bulletin, 8, 151-125 [In Persian].
Heydarpanah, H. (2015). The effect on cash holdings belonging to business groups. Master Thesis, Tehran University [In Persian].
Jia, H., Xinyang, M., Oliver, M., Rui, X.Z. (2013). Business groups in China. Journal of Corporate Finance, 22, 166-192.
Kim, K.A., Limpaphayomp, P. (1998). Taxes and firm size in pacific-basin emerging economies. Journal of International Accounting Auditing and Taxation, 7(1), 47-63.
Khanna, T., Rivkin, J. (2001). Ties that bind business groups: Evidence from an emerging economy. Working Paper, Harvard business School.
Khanna, T., Palepu, K. (2000). Is group affiliation profitable in emerging markets? An analysis of diversified Indian business groups. Journal of Finance, 55, 867-891.
Khanna, T., Yafeh, Y. (2007). Business groups in emerging markets: Paragons or parasites? The Journal of Economic Literature, 45, 331-372.
Kilich, M. (2011). The effect of business groups on investment and reduce financing restrictions in the stock exchange, Congress of dimensions and methods for financing development in the country with emphasis on the role of banking, insurance and capital markets, Tehran [In Persian].
LaPorta, R., Lo´pez-de-Silanes, F., Shleifer, A., Vishny, R. (1999). Agency problems and 28. dividend policies around the world. Journal of Finance, 55, 1-33.
Mashayekhi, B., Mehrani, S., Mehrani, K., Karami, G. (2004). The role of discretionary accruals in earnings management companies in Tehran Stock Exchange. Iranian Accounting and Auditing Reviews, 42, 74-61 [In Persian].
Mulyadi, M.S., Anwar Y. (2015). Corporate governance, earnings management and tax management, Procedia - Social and Behavioral Sciences, 177, 363-366.
Minnick, K., Noga, T. (2010). Do corporate governance characteristics influence tax management. Journal of Corporate Finance, 16, 703-718.
Morck, R., Wolfenzon, D., Yeung, B. (2005). Corporate governance, economic entrenchment, and growth. Journal of Economic Literature, 43(3), 655-720.
Moradi, M., Mostafa, D., Mohammadpour, M. (2013). Relationship membership in business groups and stock returns. Financial Accounting Researches, 22, 108-89 [In Persian].
Pourheydari, O., Deldar, M. (2011). The impact of business groups on dividend policy of listed companies in Tehran Stock Exchange. Management Accounting, 14, 94-67 [In Persian].
Pourheydari, O., Sarvestani, A. (2012). Identify and explain the affecting factors on Tax management. Journal of Accounting Knowledge, 12, 110-89 [In Persian].
Pourheydari, O., Fadawi, M.H. (2012). The effect of business groups diversification and industry type on debt inside of group. Accounting Empirical Research, 13, 83-69 [In Persian].
Pourheydari, O., Ghasemi, A. (2013). The investigation of membership in business groups on the cash flow sensitivity. Financial Science to Securities Analyze, 23, 43-29 [In Persian].
Ronny, M.V., Murinde, C., Green, J. (2012), Dividend policy and business groups: Evidence from Indian firms. International Review of Economics and Finance, 21, 42-56.
Rosy, L., Nico, D., Cynthia, V.H. (2014). Cash holdings and business group membership. Journal of Business Research, 67, 316-323.
Scholes, M., Wolfson, M., Erickson, M., Maydew, E., Shevlin, T. (2005). Taxes and Business Strategy: A Planning Approach, 3rd edition, prentice Hall Publication.
Yogesh, C., Dipanjan, K.D., Rajneesh, J. (2016). Board structure, controlling ownership, and business groups: Evidence from India. Emerging Markets Review, 16, 30-52.
Zimmerman, J. (1983). Taxes and firm size. Journal of Accounting and Economics, 5(1), 119-149.