ABSTRACT
Tax incentives are used to reduce overall tax burden, and the excess cash flows can be used to finance growth in capital expenditures and many other investments. Unfortunately, determining a tax incentive’s costs and benefits is inherently difficult because it is unknown if the firm would make the investment without the incentives. Review of recent studies has made progress measuring tax incentive effectiveness; however, the findings are inconclusive. This suggests that another explanation is needed for a firm’s decisions to take up the tax incentive. This study aims to fill the gap by investigating if the utilization of tax incentive by small and medium-sized enterprises within the manufacturing sector reduces the overall tax burden measured by effective tax rate (ETR) and significantly reduces the exercise of earnings management.
