The Moderating Role of Accounting Conservatism in the Relationship Between Tax Avoidance and Real Earnings Management
Keywords:
Accounting conservatism, financial leverage, profitability, real earnings management, tax avoidanceAbstract
This study examines the effect of tax avoidance on real earnings management and investigates the moderating role of accounting conservatism in this relationship. The statistical population comprised 35 companies listed on the Baghdad Stock Exchange over the period from 2018 to 2024. The data were analyzed using panel data regression models in Stata 17. The results indicate that tax avoidance has a positive and statistically significant effect on real earnings management. In other words, firms that engage more extensively in tax avoidance are more likely to manipulate earnings through real operating activities. Moreover, accounting conservatism negatively moderates this relationship, indicating that higher levels of accounting conservatism weaken the positive effect of tax avoidance on real earnings management. The findings further demonstrate that, in addition to tax avoidance, financial leverage has a positive and statistically significant effect on real earnings management, whereas profitability has a mitigating effect. These findings have important implications for managers, auditors, regulators, and policymakers seeking to enhance financial reporting quality and constrain opportunistic managerial behavior.
References
[1] R. L. Watts and J. L. Zimmerman, Positive accounting theory. Prentice Hall, 1986.
[2] S. Roychowdhury, "Earnings management through real activities manipulation," Journal of Accounting and Economics, vol. 42, no. 3, pp. 335-370, 2006, doi: 10.1016/j.jacceco.2006.01.002.
[3] K. A. Gunny, "The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks," Contemporary Accounting Research, vol. 27, no. 3, pp. 855-888, 2010, doi: 10.1111/j.1911-3846.2010.01029.x.
[4] A. Y. Zang, "Evidence on the trade-off between real activities manipulation and accrual-based earnings management," The Accounting Review, vol. 87, no. 2, pp. 675-703, 2012, doi: 10.2308/accr-10196.
[5] D. Cohen and P. Zarowin, "Accrual-based and real earnings management activities around seasoned equity offerings," Journal of Accounting and Economics, vol. 50, no. 1, pp. 2-19, 2010, doi: 10.1016/j.jacceco.2010.01.002.
[6] M. Hanlon and S. Heitzman, "A review of tax research," Journal of Accounting and Economics, vol. 50, no. 2-3, pp. 127-178, 2010, doi: 10.1016/j.jacceco.2010.09.002.
[7] T. J. Atwood, M. S. Drake, J. N. Myers, and L. A. Myers, "Home country tax system characteristics and corporate tax avoidance: International evidence," The Accounting Review, vol. 87, no. 6, pp. 1831-1860, 2012, doi: 10.2308/accr-50222.
[8] M. A. Desai and D. Dharmapala, "Corporate tax avoidance and high-powered incentives," Journal of Financial Economics, vol. 79, no. 1, pp. 145-179, 2006, doi: 10.1016/j.jfineco.2005.02.002.
[9] B. Badertscher, S. Katz, and S. Rego, "The separation of ownership and control and corporate tax avoidance," Journal of Accounting and Economics, vol. 56, no. 2-3, pp. 228-250, 2013, doi: 10.1016/j.jacceco.2013.08.005.
[10] S. Chen, X. Chen, Q. Cheng, and T. Shevlin, "Are family firms more tax aggressive than non-family firms?," Journal of Financial Economics, vol. 95, no. 1, pp. 41-61, 2010, doi: 10.1016/j.jfineco.2009.02.003.
[11] M. Hanlon and J. Slemrod, "What does tax aggressiveness signal? Evidence from stock price reactions to news about tax shelter involvement," Journal of Public Economics, vol. 93, no. 1-2, pp. 126-141, 2009, doi: 10.1016/j.jpubeco.2008.09.004.
[12] M. M. Frank, L. J. Lynch, and S. O. Rego, "Tax reporting aggressiveness and its relation to aggressive financial reporting," The Accounting Review, vol. 84, no. 2, pp. 467-496, 2009, doi: 10.2308/accr.2009.84.2.467.
[13] N. Khosravi, A. Akbarpour, and M. Alizadeh, "Relationship between tax avoidance and earnings management in companies listed on the Tehran Stock Exchange," Journal of Accounting and Management Vision, vol. 15, no. 2, pp. 123-135, 2019.
[14] S. Ayem, "The effect of real earnings management on tax avoidance with company size as a moderating variable," in International Conference on Accounting and Finance, 2024, vol. 1, 1 ed., pp. 100-115. [Online]. Available: https://journal.uii.ac.id/inCAF/article/view/32730.
[15] S. Basu, "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, vol. 24, no. 1, pp. 3-37, 1997, doi: 10.1016/S0165-4101(97)00014-1.
[16] R. L. Watts, "Conservatism in accounting part I: Explanations and implications," Accounting Horizons, vol. 17, no. 3, pp. 207-221, 2003, doi: 10.2308/acch.2003.17.3.207.
[17] R. LaFond and S. Roychowdhury, "Managerial ownership and accounting conservatism," Journal of Accounting Research, vol. 46, no. 1, pp. 101-135, 2008, doi: 10.1111/j.1475-679X.2008.00268.x.
[18] R. LaFond and R. L. Watts, "The information role of conservatism," The Accounting Review, vol. 83, no. 2, pp. 447-478, 2008, doi: 10.2308/accr.2008.83.2.447.
[19] M. Khan and R. L. Watts, "Estimation and empirical properties of a firm-year measure of accounting conservatism," Journal of Accounting and Economics, vol. 48, no. 2-3, pp. 132-150, 2009, doi: 10.1016/j.jacceco.2009.08.002.
[20] R. Ball and L. Shivakumar, "Earnings quality in UK private firms: Comparative loss recognition timeliness," Journal of Accounting and Economics, vol. 39, no. 1, pp. 83-128, 2005, doi: 10.1016/j.jacceco.2004.04.001.
[21] G. V. Krishnan, "Did Houston clients of Arthur Andersen recognize publicly available bad news in a timely fashion?," Contemporary Accounting Research, vol. 22, no. 1, pp. 165-193, 2005, doi: 10.1506/EGQD-BTG1-4RHD-7MU6.
[22] W. Chi, L. L. Lisic, and M. Pevzner, "Is enhanced audit quality associated with greater real earnings management?," Accounting Horizons, vol. 25, no. 2, pp. 315-335, 2011, doi: 10.2308/acch-10025.
[23] R. Mohammadi, "Relationship between accounting conservatism and earnings quality in companies listed on the Tehran Stock Exchange," Journal of Financial Accounting Research, vol. 11, no. 2, pp. 61-74, 2021.
[24] Y. Shen, "Accounting conservatism, R&D manipulation, and corporate innovation: Evidence from China," Sustainability, vol. 14, no. 15, p. 9048, 2022, doi: 10.3390/su14159048.
[25] Y. R. Abidallah and A. H. A. Al-Muhdi, "The impact of accounting conservatism on tax avoidance and firm value: Evidence from Egypt," Financial and Business Journal, vol. 10, no. 1, pp. 45-60, 2025. [Online]. Available: https://fbj.springeropen.com/articles/10.1186/s43093-025-00600-z.
Downloads
Published
Submitted
Revised
Accepted
Issue
Section
License
Copyright (c) 2025 Hadeel Mohammed Noaman Alsultani (Author); Sahar Sepasi; Vahid Mohammadrezakhani Zohroudi (Author)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
