Dividends and tax avoidance as drivers of earnings management: Evidence from dividend-paying private SMEs in Finland

Jussi Karjalainen, Eero Kasanen, Juha Kinnunen*, Jyrki Niskanen

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

15 Citations (Scopus)
39 Downloads (Pure)

Abstract

Using a sample covering practically all dividend-paying small and medium-sized private companies in Finland during 2006–2010, we document that earnings management in these companies is driven by two concurrent forces: the willingness to pay (tax-exempt) dividends and avoiding unnecessary company income tax. Moreover, we show that the need for income-increasing earnings management enabling current dividend distribution is mitigated by the amount of retained earnings from prior years. This article adds to the existing literature by providing empirical evidence for dividend and tax-driven earnings management in private SMEs facing neither political pressures nor capital market incentives for earnings disclosures.

Original languageEnglish
Pages (from-to)906-937
Number of pages32
JournalJournal of Small Business Management
Volume61
Issue number2
Early online date6 Nov 2020
DOIs
Publication statusPublished - 2023
MoE publication typeA1 Journal article-refereed

Keywords

  • dividend tax
  • earnings management
  • Private SMEs

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