Purpose: The purpose of this study is to examine whether firms from countries presenting higher levels of corruption are more likely to have higher levels of earnings management than their counterparts from countries with lower levels of corruption. It also explicitly examines how this relationship compares between emerging and developed economies. Design/methodology/approach: Using multiple regression analysis, this study tests the hypothesis of positive association between the countries’ level of corruption and the level of earnings management using a sample of foreign firms with American Depositary Receipts in the US market. Findings: Findings indicate that higher corruption perception is related to higher incentives for firms to manipulate earnings in the case of emerging countries. Such results are not identified in developed countries where the level of minority investors’ protection is higher. Findings also indicate that in developed countries earnings management is negatively related to investor protection, which is not the case for emerging countries. Originality value: As far as the authors are aware, this study is the first to examine the effects of corruption on earnings management on the basis of accounting firm-level data.

This study analyzes the level of earnings management in Latin America after the adoption of the International Financial Reporting Standards (IFRS) and analyzes the role of cross-listing in the United States. The literature on earnings management in less developed countries is still under construction, and few studies focus on this issue, especially with respect to Latin America, despite its relevant role in the global economy. This paper fills this gap in the literature as it analyzes the level of IFRS earnings management regarding the first and main Latin American countries applying IFRS (Brazil and Chile), when compared to the main Anglo-Saxon countries with IFRS tradition (United Kingdom and Australia), and with the main Continental European economies (France and Germany). The results show that Latin American firms present a higher level of earnings management than Continental European and Anglo-Saxon firms, and this opportunistic behavior remains significant when only global players with cross-listing in the United States are analyzed. Thus, even with a unique set of high quality accounting standards (IFRS) and strong reporting incentives, countries' specific characteristics still play an important role in the way IFRS is implemented in each country.

Purpose: This study investigates the impact of different transfer pricing rules on tax-induced profit shifting. Existing studies create different enforcement rankings of countries based on specific transfer pricing provisions on the assumption that larger penalties and more extensive information requirements imply higher tax enforcement. This assumption carries limitations related to the impact of transfer pricing rules in different countries and to the interaction of different tax rules. Instead, the authors propose a nonordered segregation of groups of countries with different transfer pricing rules, and they empirically investigate the impact of these transfer pricing rules on the profit-shifting behavior of firms.Design/methodology/approach: The authors apply the hierarchical clustering method to analyze 57 observable quantitative and qualitative characteristics of transfer pricing rules of each country. This approach allows the creation of groups of countries based on a comprehensive set of regulatory characteristics, to investigate evidence of profit shifting for each of these separate groups. Profit-shifting behavior is measured by the variation in the volume of import and export transactions between local firms and related parties located in other countries.Findings: The results indicate that firms have a higher volume of intrafirm transactions with related parties located in countries with a lower tax rate. This result is consistent with the profit-shifting hypothesis. Moreover, the results show that relevant differences in transfer pricing rules across countries produce different effects on the volume of intrafirm transactions. The authors observe that the existence of domestic transfer pricing rules that override the OECD Transfer Pricing Guidelines may inhibit profit shifting. In addition, the results suggest that the OECD guidelines may facilitate profit shifting. Overall, it is observed that some transfer pricing rules may be more effective than others in curbing profit shifting and that firms are still able to manipulate transfer prices under some tax rules.Research limitations/implications: (1) The authors focus on the Brazilian context, which provides a suitable set of profit-shifting incentives for the analysis, since it combines an extreme corporate tax rate, a highly complex tax system, and a unique set of transfer pricing rules. (2) Profit-shifting behavior is captured by the volume of intrafirm transactions. The authors would prefer to observe the transfer price directly; however, this information is not disclosed by firms, for it may represent a limitation to the investigation. Nonetheless, theory shows that the profit-shifting behavior is reflected by the manipulation of both transfer prices and intra-firm outputs.Practical implications: The authors find that the volume of intrafirm transactions may decrease or increase, depending on the transfer pricing system of the foreign country (including the tax-differential effect). It suggests that some transfer pricing rules are more effective than others in curtailing the profit-shifting behavior and that firms are still able to find vulnerabilities in current rules and take advantage of them in deploying a profit-shifting strategy.Social implications: Results provide knowledge about how key differences on transfer pricing rules across countries influence the profit-shifting behavior. The results of the study may have valuable application in solving regulatory mismatches, to eliminate blind spots in transfer pricing rules and thus to contribute to the current review of OECD guidelines and to the global tax reset movement.Originality/value: Recent studies suggest that if tax-avoidance incentives are somewhat weak, it becomes difficult to observe the shifting behavior of firms. The puzzle is to check whether profit shifting is nonexistent under weak incentives or whether this is a matter of methodological limitations. The authors’ analysis is applied to a complex tax background with strong profit-shifting incentives; thus, it allows the authors to obtain robust evidences of the shifting behavior and the effect of different transfer pricing rules.

This study investigates whether Brazilian loss-making firms manage deferred income tax as a form of big bath strategy. "Big bath” is a strategy in which a firm manages earnings by intentionally recording large non-recurring losses. We found original evidence supporting the hypothesis of big bath through the managing of deferred taxes under CPC 32/IAS 12. Deferred tax expenses can be used as a tool for reducing earnings because of the subjectivity and timing involved. To analyze the excess of deferred taxes, we propose a particular research strategy that is based on the increased homogeneity of accounting standards and tax regulation in Brazilian listed firms. This analysis provides new evidence of big bath adjustments that was never described before in the literature. We analyze 226 Brazilian listed firms for the 2011-2015 period. We designed a linear model to estimate deferred tax excess that is based on the conditional independence between treatment and effect under accounting standard CPC32/IAS 12. For our baseline analysis, we used least squares with controlling covariates. We also used two-stage least squares to control for omitted variables bias. This paper finds evidence that Brazilian firms can manage deferred income tax as a form of big bath. Results indicate that loss-making firms disclose significantly higher excesses of net deferred tax expenses, and that these excesses increase with losses.

We investigate tax-induced profit shifting in Brazil and the impact of tax havens on the shifting behavior of firms. Profit shifting research in Brazil is virtually non-existent, although the shifting incentives in Brazil are prominent. Our research fills this gap with evidences in the novel Brazilian context. Profit shifting is a tax-minimization strategy where multinational enterprises perform intra-firm transactions to allocate taxable profits to low-tax locations. Brazil combines a remarking set of profit shifting incentives, especially a high corporate tax rate, extremely complex tax system, and distinguished transfer pricing rules. Further researches may leverage from the shifting incentives in Brazil, since it provides opportunities to investigate additional factors that affect the shifting behavior of firms. We analyze 989 transaction-by-country observations for the period of 2010-2017. Baseline analysis follows the robust least squares approach with controlling covariates. Linear estimate model derives from the conventional Cobb-Douglas production function, to analyze the impact of shifting incentives on profit maximization. We find that Brazilian firms have a high level of intra-firm transactions with related parties located in low-tax countries, especially with tax havens. It represents a strong evidence of profit shifting behavior in Brazilian firms.