The effects of state ownership and tax rate cuts on accounting conservatism: evidence from Vietnam

Abstract

Purpose The purpose of this paper is to examine the joint effects of state ownership and tax rate cuts on accounting conservatism, considering the different levels of foreign ownership in the context of Vietnam. Design/methodology/approach The paper uses ordinary least squares regressions and a data set of 405 firms covering the period 2007 to 2019. The manuscript uses three measures of accounting conservatism: Basu’s 1997 timeliness of earnings, Basu’s 1997 earnings persistence and the book-to-market ratio. Findings State-owned enterprises (SOEs) adopt less accounting conservatism than non-SOEs; however, the result is only robust in firms with foreign ownership being lower than the foreign ownership median. Firms increase accounting conservatism in the year immediately prior to the year that the tax rate cuts become effective. An SOE possesses an unusual conflict both as a taxpayer and in having its controlling interest held by the government, which is both a tax creator and a tax collector. Interestingly, the increase in accounting conservatism prior to the year of the tax rate cuts is more pronounced for non-SOEs than SOEs. Practical implications This research is beneficial to investors and policymakers where the government is both the taxpayer and tax collector and in emerging markets where foreign investment is local firms’ important financing. Originality/value To the best knowledge, this study is the first in examining the joint effects of state control and tax rate cuts on accounting conservatism.

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“…So it can be concluded that managers will try to maximize their level of tax avoidance by changing their policies following changes in policies related to corporate taxation. As stated by previous research, to optimize the level of tax avoidance when dealing with regulations that affect tax avoidance strategies, companies must develop other strategies (Kim et al, 2019) Figure 1 Source: Agency Theory-Tax Avoidance Framework (Wilde & Wilson, 2018) Companies may engage in or intensify tax avoidance as a result of reduced corporate income tax rates (Le & Moore, 2022). And shifting profits to years with lower corporate income tax rates is one of the tax avoidance strategies (Le & Moore, 2022).…”

“…As stated by previous research, to optimize the level of tax avoidance when dealing with regulations that affect tax avoidance strategies, companies must develop other strategies (Kim et al, 2019) Figure 1 Source: Agency Theory-Tax Avoidance Framework (Wilde & Wilson, 2018) Companies may engage in or intensify tax avoidance as a result of reduced corporate income tax rates (Le & Moore, 2022). And shifting profits to years with lower corporate income tax rates is one of the tax avoidance strategies (Le & Moore, 2022). In addition, several previous studies have proven that corporate conservatism leads to additional tax savings due to a decrease in corporate income tax rates (Andries et al, 2017;Lin et al, 2014).…”