Purpose – The purpose of this paper is to investigate the effect of financial factors on firms’ financial and tax reporting decisions. Firms often face the difficulties of accomplishing both financial and reporting goals. The extent to which reporting they put more value depends on the differential weighting of firms’ financial reporting and tax costs. The authors incorporate various financial factors as a source of cross-sectional differences in the weighing of both financial reporting and tax costs. Design/methodology/approach – To examine firms’ decisions when fulfilling both the purposes of financial and tax reporting is difficult, the authors use a large set of firms in Korea, where book-tax conformity is high and aggressive tax shelters are restricted. The authors develop a new measure that can specify firms’ decision making between financial and tax reporting by considering both earnings management and tax avoidance. Findings – The findings show that debt ratio affects firms’ financial and tax reporting decisions non-monotonically depending on the level of the debt ratio. The authors also find that firms with more long-term debt financing are more likely to be aggressive in financial reporting, while firms with higher financing deficit or better access to the capital market are more likely to be aggressive in tax reporting. Research limitations/implications – Thus, the findings provide more compelling evidence of firms’ decision making between two conflicting strategies, particularly when fulfilling both the purposes of financial and tax reporting is difficult. The authors expect that the results provide practical implications to standard setters, auditors and financial statement users who are interested in the ongoing debate over book-tax tradeoffs. Originality/value – This paper fulfills an identified need to study how firms’ decision making between two conflicting reporting strategies are affected by the various financial factors, which are closely linked to a firm’s financial reporting and tax costs.

Purpose This study aims to verify the circumstances under which managing the allowance for uncollectible accounts is used as a tool of earnings management. Design/methodology/approach The authors investigate whether bad debt expense, which is an income statement counterpart of allowance for uncollectible accounts, is adjusted downward when pre-managed earnings is slightly above zero earnings, prior year’s earnings or analysts’ forecasts. Findings The findings of this study show that firms manage bad debt expense downward to avoid losses, sustain the prior year’s earnings and meet or beat analysts’ forecasts. The authors also find that the understatement of bad debt expense to meet earnings benchmarks is pronounced for firms with high tax costs. Social implications Standard setters and auditors can gain a better understanding in detail of the practices and methods of managing earnings via the allowance for uncollectible accounts. Originality/value This study is the first to examine earnings management via the allowance for uncollectible accounts in non-financial Korean firms. In addition, the findings provide the evidence that firms prefer to use the allowance for uncollectible accounts as a strategic tool to meet benchmarks, especially when their tax costs are high.

This study aims to verify the usefulness of the tax avoidance proxy developed by Desai and Dharmapala (2006) in the setting where accounting-tax alignment is relatively high and aggressive tax planning is restricted. By using a large set of firms in Korea, I empirically test whether the tax avoidance proxy detects the management of book-tax and book-only accruals. My findings show that downward management of book-tax accruals for tax reporting purposes is not detected by the tax avoidance proxy. However, upward management of book-only accruals for financial reporting purposes is captured by the tax avoidance proxy. In addition, the tax avoidance proxy better detects simultaneous management of two accrual components than management of book-tax accruals alone. Lastly, the tax avoidance proxy is more powerful in detecting tax avoidance activities in a sample of firms with high tax and financial reporting costs than in firms that carry high tax costs but low financial reporting costs. The results of this study imply that the tax avoidance proxy can be a good indicator only when used for firms that are conscious of their financial reporting costs and have incentive to manage both taxable and book income at the same time under the setting where book-tax conformity is high and aggressive tax shelters are restricted. This study sheds light on the usefulness of the tax avoidance proxy which has been widely used in the accounting studies and provides a caveat to researchers that the proxy should be employed with caution and in appropriate setting.

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This study investigates the relationship between industry competition and managers’ voluntary disclosure policies and examined how the corporate governance structure affects this relationship in South Korean companies. The fiercer the competition within the industry to which the company belongs, the higher the incentive for managers to perform strategic actions to improve their competition status. This increase in the strategic incentives of managers can be seen through voluntary disclosure policies. The empirical results of this study are as follows. First, it was found that there was a negative relationship between the degree of industry competition and the level of voluntary disclosure of greenhouse gas emissions information. This means that managers perform less disclosure to maximize the value of the company because the more competition within the industry intensifies, the higher the proprietary cost of disclosing information on greenhouse gas emissions information. Second, it was found that the corporate governance structure weakened the relationship between the degree of industry competition and the level of corporate voluntary disclosure. These results can be interpreted as that a good governance structure supports such managers’ disclosure decisions because managers are more likely to choose disclosure policies to maximize the value of the company than personal benefits even in the fierce industry competition.