Correlation between Tax Holidays and Earnings Management: An Empirical Study

This study investigates tax avoidance activities among tax-exempt Malaysian companies. Pioneer status companies enjoy up to 100 percent tax exemption on their statutory income for promoting certain activities or producing certain products. In this context, we explore the tendency of companies to manage earnings by shifting income through certain periods and thereby minimizing tax liabilities. Following the literature, discretionary current accruals are used as proxy for earnings management. A control sample is introduced to identify abnormal accruals induced by the pioneer status of companies. Multiple regression analysis indicates that companies manage their earnings to minimize their tax burden. Specifically, pioneer status companies in Malaysia accelerate revenues to the year prior to the expiration of their tax exemptions to reduce tax liabilities in subsequent years.