Non-conforming tax avoidance and real earnings management

Purpose The research objective of this paper is to investigate the relationship between real earnings management (hereafter EM) and non-conforming tax avoidance (hereafter TM). Design/methodology/approach This study employs multiple linear regression analysis to examine the association between real EM and non-conforming TM. The empirical tests are conducted using a sample of US publicly listed firms over the period 1993–2021. To ensure the robustness of the inferences, we perform a series of additional tests. Findings The findings reveal a statistically significant positive relationship between real EM and non-conforming TM. This conclusion is further substantiated across a series of robustness checks, which bolster the overall validity of the study. It is noteworthy, however, that the implementation of the Tax Cuts and Jobs Act (hereafter TCJA) could potentially mitigate the observed positive association. Originality/value This study contributes to the tax literature by examining the underexplored link between real earnings manipulation and non-conforming tax practices in the US context, thereby complementing the predominant focus on accrual-based EM. Our findings underscore the critical need for investors and regulators to integrate assessments of a firm's real financial reporting aggressiveness into their analytical frameworks. Moving beyond a singular examination of tax reporting practices is essential for enhancing the detection of non-conforming TM behaviors.