Abstract
This study examines tax, financial reporting, and tunneling incentives on the transfer pricing decisions of Chinese-listed companies. We use the relative gross profit ratios of related- and unrelated-party transactions to measure transfer pricing strategies. We find evidence supporting the view that transfer pricing is used to (i) increase a listed firm's profits as the corporate income tax rate decreases, (ii) increase a listed firm's profits if its management's compensation is determined by reference to reported profits, and (iii) decrease a listed firm's profits as the percentage of shares owned by the government increases (i.e., the tunneling effect.) For those firms that face both tax and tunneling incentives we find that the incentives tend to offset each other such that there is no discernable earnings management.
| Original language | English |
|---|---|
| Pages (from-to) | 1-26 |
| Number of pages | 26 |
| Journal | Journal of the American Taxation Association |
| Volume | 32 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - 2010 |
Funding
We thank Professor Richard Sansing (editor) and the reviewers for their extensive comments and suggestions on the paper. We also thank Professor K. H. Chan and workshop participants at the Hong Kong Polytechnic University and the 19th Asian-Pacific Conference on International Accounting Issues for their helpful comments and suggestions. This research has benefited from financial support from the Government of the HKSAR (GRF340408) and Lingnan University, Hong Kong (DR07A1).