ABSTRACT
The Ministry of Finance issued the new China accounting standards on February 15, 2006 (CAS2006), which requires the listed companies to use the balance sheet liability method for income tax accounting. It gives us an opportunity to investigate the earnings management of listed companies from the perspective of income tax. Under the balance sheet liability method, we investigate the relationship between income tax planning and earnings management in the publicly listed companies. We find that when engaging in earnings management, listed companies will trade off conforming and nonconforming earnings management from the perspective of income tax cost. Managers’ motivations and purposes will influence the choice. When the company has motivations to turn losses into gains and has motivations to avoid penalty cost associated with fraud being found, the company prefers to employ more conforming earnings management strategies.
