The association between book-tax conformity and earnings management

The association between book-tax conformity and earnings management There is an ongoing debate in the literature about the costs and benefits of conforming book and taxable income. Proponents argue that increased book-tax conformity will reduce aggressive financial reporting: managing earnings up increases taxes and will curtail abusive tax shelters because managing taxes down decreases earnings reported to shareholders. We use a panel of 139,536 firm-year observations across 34 countries over the period 1996–2007 to test whether high levels of book-tax conformity are associated with less earnings management. We find that higher book-tax conformity is associated with significantly more, not less, earnings management. We conclude that one of the primary claimed benefits of increasing book-tax conformity, more truthful financial reporting with less earnings management, is unlikely to be as large as previously thought. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

The association between book-tax conformity and earnings management

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Publisher
Springer US
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Accounting/Auditing; Finance/Investment/Banking; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-014-9291-x
Publisher site
See Article on Publisher Site

Abstract

There is an ongoing debate in the literature about the costs and benefits of conforming book and taxable income. Proponents argue that increased book-tax conformity will reduce aggressive financial reporting: managing earnings up increases taxes and will curtail abusive tax shelters because managing taxes down decreases earnings reported to shareholders. We use a panel of 139,536 firm-year observations across 34 countries over the period 1996–2007 to test whether high levels of book-tax conformity are associated with less earnings management. We find that higher book-tax conformity is associated with significantly more, not less, earnings management. We conclude that one of the primary claimed benefits of increasing book-tax conformity, more truthful financial reporting with less earnings management, is unlikely to be as large as previously thought.

Journal

Review of Accounting StudiesSpringer Journals

Published: May 16, 2014

References

  • Book-tax conformity, earnings persistence and the association between earnings and future cash flows
    Atwood, T; Drake, M; Myers, L
  • International accounting standards and accounting quality
    Barth, M; Landsman, W; Lang, M
  • What determines corporate transparency?
    Bushman, R; Piotroski, J; Smith, A
  • Will a departure from tax-based accounting encourage tax noncompliance? Archival evidence from a transition economy
    Chan, K; Lin, K; Mo, P
  • Detecting earnings management
    Dechow, P; Skinner, D; Sweeney, A

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