Earnings Management Unveiled: The Moderating Influence of Tax Planning on Deferred Tax Expense and Book Tax Differences

Abstract

This study investigates the effect of Deferred Tax Expense (DTE) and Book-Tax Differences (BTD) on Earnings Management (EM), with a focus on the moderating role of Tax Planning. Using panel data from non-financial firms over a specified period, the research employs Panel Least Squares (PLS) regression analysis to test the hypothesized relationships. The results reveal that Deferred Tax Expense has a significant positive effect on Earnings Management, supporting the view that tax-related timing items offer discretionary space for managers to manipulate earnings. In contrast, Book-Tax Differences show only a marginally significant relationship, suggesting a weaker or context-dependent influence on earnings manipulation.

Further analysis demonstrates that Tax Planning significantly moderates the relationship between Deferred Tax Expense and Earnings Management, indicating that firms with more strategic tax planning are less likely to use deferred tax items for earnings manipulation. However, Tax Planning does not significantly moderate the effect of Book-Tax Differences on Earnings Management. These findings contribute to the literature on tax-related financial reporting behavior and highlight the importance of incorporating tax planning considerations into the assessment of earnings quality. The study also offers practical implications for regulators, auditors, and investors in monitoring financial transparency.