Abstract
This study investigated the connection between bonus depreciation tax policies and cost management practices. The study used a difference-in-differences design to examine the impact of the changes to bonus depreciation policy brought about by the 2017 Tax Cuts and Jobs Act (TCJA). The study found that firms that have more to gain from bonus depreciation engage in greater real earnings management (REM) after the implementation of the TCJA. This effect is concentrated in firms where there are high marginal costs for accelerated asset purchases including cash-constrained firms, firms with earnings that just beat/meet analysts’ consensus forecasts, and firms with high equity incentives. The findings of this study added to the understanding of earnings management behavior. Temporary bonus depreciation policies, which decrease the after-tax cost of capital investment, can change the timing of corporate purchases, and increase the use of REM to offset the related cash outflow. It is important for policy makers to consider the non-tax effects of temporary tax benefits. Stakeholders should be aware of the tendency of management to use REM to offset the effects of tax strategies.
Key words: Bonus deprecation, tax planning, earnings management, equity incentives, cash constraint.