Additional 10% Surtax on Undistributed Retained Earnings: Managerial and Market Responses

• Main Authors: Hsiu-Yu Chang, 張秀瑜
• Other Authors: Wei-Heng Lin
• Format: Others
• Language: zh-TW
• Published: 2002
• Online Access: http://ndltd.ncl.edu.tw/handle/83603187454133789461

碩士 === 中原大學 === 會計研究所 === 90 === The first object of this study attempts to investigate whether firms increase dividends payout ratio and manipulate earnings through discretionary accruals in order to avoid or minimize additional 10% surtax on undistributed current year layer to retained earnings. The manipulated earnings, while preserving tax-related cash flows, make assessment on earnings persistence more difficult. In addition, the 10% surtax on undistributed retained earnings will be recognized as income tax expense in next year. This accounting regulation violates matching principle. Therefore, the earnings response coefficients in years 1997, 1998 and 1999 are expected to be lower than than those in other normal years for lower earnings quality. The empirical results are as follows: 1. Cash dividends payout ratio in 1998 is significantly higher than the cash dividends payout ratio in 1997, despite that change of free cash flow in 1998 is significantly negative. It appears that the increase in cash dividends cannot be explained by cash flows. There is no significant increase in stock dividends payout ratios in 1998 compared to 1997, the ensuing year of integrated income tax system. Firms whose change in retained earnings is negative decrease stock dividends. Future profitability or EPS dilution, which can be detrimental to firm value, is one reason behind the empirical findings. Take both cash and stock dividends together, firms with positive change in retained earnings increases dividends payout ratio in 1998. These firms lowered their retained earnings through dividends in order to avoid 10% surtax on retained earnings. 2. The discretionary accruals of 1997 calculated from cross-sectional Jones model is significantly positive, and is greater than discretionary accruals of both 1996 and 1998. It appears that sample firms manipulate earnings up in 1997. The discretionary accruals of 1998 are not lower than those of 1996. The positive discretionary accruals of 1997 might not reverse as expected in 1998. 3. With regard to the effects of earnings management on the earnings response coefficients, ERC in 1999 is significantly negative as expected. The additional 10% surtax on undistributed retained earnings earned in 1998 is recognized as income tax expense for 1999. The mismatch lowers earnings quality and the ERC. Nevertheless, the act of earnings management in 1997 in order to save cash outflow on income tax do not give rise to lower ERCs, earnings quality.