Earnings Management-Tax Shelter Nexus in Nigeria: An Application of Small Positive Net Income

Abstract

Tax sheltering, tax avoidance and tax planning employed interchangeably are major tax income saving strategies available to managers of corporate organizations. The study attempts to provide information to investors and regulatory authorities in Nigeria about earnings management and its attendant consequences on tax sheltering activities. In this study, debt tax is employed as proxy for firms’ tax shelters activities while small positive net profit is employed as proxy for earnings management. A sample of 75 non-financial companies listed on the Nigerian Exchange Group (NGX) for period between 2010 and 2019 was employed in this study. Preliminary analyses: descriptive statistics was conducted while Least Square Dummy Variable (LSDV) regression analysis technique is employed to test the possible effect of earnings management on tax shelter. The result obtained from the regression analysis show that managers employ small positive net profit earnings management technique to shield taxes. The implication can be viewed from the lenses of behavioural finance which suggest that stock market response is quick and positive on tax shelters because investors focus on profitability without detail screening of cash flows. Hence, tax avoider firms are likely to have lower future profit and lower future stock returns than other benchmark firms. Succinctly, we urge investors and government tax authorities to set up policies and regulations capable of checkmating tax evading managers as firm managers may go beyond statutory shelter requirements to manage earnings for private gains.