Tax avoidance and earnings management: Evidence from French firms

In France, accounting regulations and tax legislation follow separate paths. Thus, the areas of nonconformity between financial accounting standards and tax laws can create opportunities for firms to engage in opportunistic behaviors. For instance, they may manipulate earnings in order to minimize tax liabilities while still presenting favorable financial results to stakeholders. This gives us an opportunity to investigate the nature of the relationship between tax avoidance (TA) and earnings management. Using a sample of 323 French firms over the period 2010-2017, we provide evidence that there is a positive simultaneous relationship between TA and earnings management. Consistent with agency theory and political-contractual perspectives, our empirical results highlight that discrepancies between accounting standards and tax laws can impact reporting practices, potentially leading to a portrayal of a more favorable financial position than the actual reality. Besides, our finding suggests that owing to the fact that French firms operate in an environment that allows substantial discretion in their financial and tax accounting decision, they could, therefore, have a greater ability to be aggressive for both financial and tax reporting purposes. Hence, it is recommended that regulators minimize the discretion in financial and tax standards. Additionally, this study will be useful for investors to adopt a higher degree of monitoring in order to reduce managerial opportunistic behavior.