Determinants of Corporate Financial Factors on Tax Reporting Strategy

International Journal of Economics and Financial Issues ISSN: 2146-4138 available at http: www.econjournals.com International Journal of Economics and Financial Issues, 2017, 7(3), 377-381. Determinants of Corporate Financial Factors on Tax Reporting Strategy Hashem Valipour1, Saeid Homayoun2*, Fateme Piran3 Accounting Department, Marvdasht Branch, Islamic Azad University, Marvdasht, Iran, 2Faculty of Education and Economics, University of Gävle, Sweden, 3Accounting Department, Marvdasht Branch, Islamic Azad University, Marvdasht, Iran. *Email: 1 ABSTRACT The primary objective of present study is to analyze the effects of financial factors on financial and tax reporting decisions. The statistical population of present study includes all companies listed in Tehran Stock Exchange out of which 438 companies are included in the statistical sample of present study. The results suggests that there is a significant positive association between debt ratio and aggressive financial reporting. In addition, there is a significant negative association between debt ratio and aggressive tax reporting. Keywords: Debt Ratio, Long-term Debt Ratio, Aggressive Financial Reporting, Aggressive Tax Reporting JEL Classifications: M4, H25, H2 1. INTRODUCTION Financing activities are recognized as a source of temporary differences in weighing of financial reporting and tax costs (Lee, 2015). Financing is one of the significant activities and supports consistent operations and strategic investments of a company because capital is essential to decide to invest in working capital and equipment. Weakness in capital financing exposes companies to liquidity risk and limits the ability of such companies in continuing their operations. In this regard, financing is one of the critical activities that generally affect decision-making process of managers of top companies. In addition, financial factors are closely associated with financial reporting and tax costs of companies (Lee, 2015). Here, two points should be noted. First, debt ratio of a company is associated with financial reporting costs because financing through debt increases risk of accounting-based debt covenant violation. Numerous studies conducted in the past suggest that companies with higher debt ratio have the urge to increasingly adopt book earnings management to decrease financial reporting costs (Watts and Zimmerman, 1986; Duke and Hunt, 1990; DeFond and Jiambalvo, 1994). Second, debt ratio is associated with tax expenses because debt financing permits companies to enjoy reductive effects of taxes due to interest expenses. Consequently, one could state that as debt ratio of a company increases, its tax expenses reduce (Mackie-Mason, 1990; Collins and Shackelford, 1992; Dhaliwal et al., 1992). In Iran, tax laws have vivid differences from those of other countries. In addition, debt financing of Iranian companies is radically different from that of other countries of the world. In some cases, financial reporting of Iranian companies is different from foreign companies. More importantly, culture of Iranian managers is different from culture of foreign managers. Therefore, considering above issues, one could state that problem of present study would be stated in the following manner: “Do financial factors affect managers’ financial and tax reporting decisions in Iran and specifically in Tehran Stock Exchange?” Numerous studies conducted in the past suggested that one of the most fundamental sources of financing for companies is debt financing. Today, this issue is evident in Iran more than ever. On the other hand, one of the key duties of companies in the field of offering information to market is financial and tax reporting. However, few studies have been conducted on the role of financial factors in companies’ reporting strategies. Considering the fact that International Journal of Economics and Financial Issues | Vol 7 • Issue 3 • 2017 377 Valipour et al.: Determinants of Corporate Financial Factors on Tax Reporting Strategy financial reporting and tax reporting are not distinct notions but they have been analyzed separately in most of previous studies, it seems essential to adopt a method that deals with both of these notions simultaneously. Therefore, the present study is significant in the sense that it adopts a method for concurrent study of financial and tax reporting to add new evidence to existing literature. Consequently, managers, investors and authorities of Stock Exchange could base many of their decisions on such evidence. In regard to innovation in the present study, one should note that this is the first study that deals with the subject experimentally in Iran and specifically in Tehran Stock Exchange. The present study aims to reveal the effects of financial factors on companies’ selection of reporting strategy. In other words, the present study intends to tackle the question whether companies with different debt ratios adopt different aggressive financial or tax reporting or not?” In addition, the role of long-term debts within capital structure of companies in their use of aggressive tax reporting has been addressed. 2. THEORETICAL PRINCIPLES AND REVIEW OF LITERATURE Capital market is a significant driving force behind information economy. Proper flow of information in this market leads to making logical and proper decisions by participants. In this case, economic development and improvement of social well-being result. Financial reporting is a primary means of communication between a company and its different beneficiary groups (e.g., shareholders, creditors and employees, etc.,) (Scott, 2003). On the other hand, accounting is the process of identification, measurement, classification, and reporting of financial data to enable informed judgment and making logical decisions by users of financial data (Scott, 2003). Therefore, accounting is a system of data processing designed for identification, measurement, and classification of financial events affecting different organizations and business units and reporting influence of this type of events to decision makers. Financial accounting data is final product of accounting systems and extra-organizational reporting of companies, which is made available to the public after measurement (Bushman and Smith, 2001). Financial accounting systems could directly offer input data regarding control mechanisms. In addition, it is used indirectly as a control mechanism that companies adopt to control prices of shares beforehand. Therefore, one could imply that profit management is management of users’ expectations and impressions of financial statements so that managers could attain their distinctive objectives the majority of which contribute to personal benefits of management. Depending on the situation, generating distinct expectations and impressions in users could be realized by increasing or reducing profit. In fact, management uses its authorities regarding selectio (...truncated)