Desai 2005 argue that a one book system would offer less leeway for opportunistic reporting behavior, i. We first validate a new empirical approach for examining taxinduced earnings management using european unconsolidated financial and ownership information over 200520. Tax conformity of earnings and the pricing of accruals. A potential benefit of increasing booktax conformity. Jae journal of accounting and economics vol 50, issue.
High book tax conformity is consistent with a common system for both accounting and taxation purposes, where financial accounting is directly used to calculate taxable income. Financial reporting, tax costs, and booktax conformity financial reporting, tax costs, and booktax conformity guenther, david a maydew, edward l nutter, sarah e. Prior studies examining crosscountry differences in the properties of accounting earnings generally do not control for the effects of booktax conformity or follow an indicator variable approach, where the indicator variable is based on subjective assessments of each countrys booktax conformity level e. Tax conformity may depict the firm to external parties i. Booktax conformity for corporate income 103 compelling because it could contribute to the transparency of the tax system. Our inquiry exploits a natural experiment first examined by guenther et al.
Proponents of increased book tax conformity argue that tax compliance will increase and earnings quality will improve. Financial reporting, tax costs, and booktax conformity sciencedirect. Based on the findings of their research, we examine the association between the. Prior studies document a decrease in the informativeness of accounting earnings for equity markets resulting from higher booktax conformity. The association between booktax conformity and earnings management abstract there is an ongoing debate in the literature about the costs and benefits of conforming book and taxable income. The study uses financial statement data from the orbis database of bureau van dijk. Booktax conformity and capital structure springerlink. We find evidence consistent with the increase in book tax conformity reducing the usefulness of financial accounting earnings. Although both one and twobook systems are present in europe, european data have not been used to contribute to this debate. A dataset of national reforms lowering the corporate tax rate is used to estimate the effect of conformity on private firms earnings management behavior when a specific incentive to manage earnings downward exists. In general, booktax conformity is the association between financial accounting income and taxable income.
By requiring booktax conformity, they contend that. May 01, 2010 booktax conformity, earnings persistence and the association between earnings and future cash flows booktax conformity, earnings persistence and the association between earnings and future cash flows atwood, t. We find, however, that increasing book tax conformity has an unintended. Prior research has separately examined pretax earnings management activities that have current taxable income consequences book. Throughout our study, booktax conformity represents the required degree of book income alignment with taxable income. Booktax conformity, earnings persistence and the association between earnings and future cash flows, journal of accounting and economics, elsevier, vol. Other studies including hanlon, laplante and shevlin. The association between booktax conformity and earnings management. Maria theresia evers, ina meier, katharina nicolay november 2016. Wet explain two reporting requirements imposed on european firms that differ from those placed on u. Pleskoearnings management and the corporate alternative minimum tax. The results of the study offer new insights to the puzzle of booktax conformity and earnings management by supporting tang 2015 in the general context, and watrin et al. Jul 18, 2016 our study explores a possible benefit of conforming book income to taxable income.
For more than one hundred years the determination of corporate taxable income has been characterized by the socalled ma. Abstractthis paper examines whether booktax conformity i. Over the last decade, a large body of tax accounting literature on the association between booktax conformity btcbooktax differences btd and firms opportunistic reporting behavior has emerged. The two incomes diverged in the late 1990s, with financial accounting income becoming increasingly greater than taxable income through the year 2000. Over the last decade, a large body of tax accounting literature on the association between booktax conformity btcbooktax differences and firms opportunistic reporting btd behavior has emerged. Discussion of booktax conformity and earnings management. May 16, 2014 the exception relates to the effect of increased conformity on earnings smoothing. Proponents of increased booktax conformity argue that tax compliance will increase and earnings quality will improve. Over the last decade, a large body of tax accounting literature on the association between booktax conformity btcbooktax differences btd and. The association between booktax conformity and earnings. We find evidence suggesting that taxable income management is not related to book income management in firms operating under a moderate level of booktax conformity. High booktax conformity is consistent with a common system for both accounting and taxation purposes, where financial accounting is directly used to calculate taxable income. Booktax conformity and the informativeness of earnings. Booktax conformity and earnings management american.
The information content of earnings as measured by the longwindow earnings response coefficients and the r. Proponents of booktax conformity argue that the current dual system in the u. The journal of the american taxation association 36. Atwood 2014 discussion of booktax conformity and earnings management. Desai 2005 argue that a onebook system would offer less leeway for opportunistic reporting behavior, i. It is measured at the country level, using the approach of atwood et al. Proponents argue that increased booktax conformity will reduce aggressive financial reporting because managing earnings up increases taxes and will curtail.
Booktax conformity and earnings management in response to. The exception relates to the effect of increased conformity on earnings smoothing. The effect of booktax conformity and tax accounting incentives on financial accounting. Booktax conformity and earnings management rev account. Journal of the american taxation association, 17 1995, pp. Tax policy and the economy, volume 19, pages 1014, national bureau of economic research, inc. We find evidence suggesting that taxable income management is not related to. Taxinduced earnings management and booktax conformity. Financial reporting, tax costs, and booktax conformity. Booktax conformity, earnings persistence and the association between earnings and future cash flows t. Audit fees and booktax differences the journal of the. Booktax differences and future earnings changes the.
We find evidence consistent with the increase in booktax conformity reducing the usefulness of financial accounting earnings. Evidence from public and private limited companies in germany. Proponents argue that increased booktax conformity will reduce. The results of the study offer new insights to the puzzle of book tax conformity and earnings management by supporting tang 2015 in the general context, and watrin et al. The aim of this study was to empirically examine whether booktax differences btd is an indicator of earnings management and tax avoidance in g20 countries.
Does booktax conformity deter opportunistic book and tax. We examine how a comprehensive change in booktax conformity affects firms reporting behavior. Our paper focuses mainly on the third proposalthe conforming of book and taxable incomes. While many accountants oppose book tax conformity and tend to dismiss its possibility, there is support among some economists and lawyers and it has spilled into congressional testimony e. Do firms using real earnings management care about taxes.
Book tax conformity, earnings persistence and the association between earnings and future cash flows t. The association between booktax conformity and earnings management bradley blaylock fabio gaertner terry shevlin published online. While the cause of this divergence is not known for certain, many suspect that it is the result of earnings management for financial accounting and or the tax sheltering of corporate income. Our study documents the prevalence of, and then investigates the firm. Booktax accruals affect both reported earnings and taxable income, while bookonly accruals affect only reported earnings. Yet, existing empirical evidence on the questions whether increased book tax conformity actually reduces earnings management em and or tax sheltering ts and whether book tax differences are really indicative of such opportunistic reporting behavior is not yet clear. Pdf booktax conformity and earnings management in response. In general, book tax conformity is the association between financial accounting income and taxable income.
Proponents of booktax conformity argue that increasing book. While proponents of conformity argue that booktax differences help firms smooth book income, a subset of the accounting literature argues that managers incentives to smooth taxable income will carry over to smoother accounting earnings under high booktax conformity alford et al. A contribution of this study is the analysis of a clear incentive for earnings management. We examine whether the level of required book tax conformity affects earnings persistence and the association between earnings and future cash flows. The essay documents that higher conformity between accounting and tax reporting in jurisdictions is associated with more earnings management in response to an upcom ing change in the tax rate. Proponents argue that increased booktax conformity will reduce aggressive financial reporting because managing earnings up increases taxes and will curtail abusive tax shelters because managing taxes down decreases earnings reported to shareholders.
This study aimed to examine whether higher booktax conformity restricts earnings management in public companies, nonfinancial corporations, listed in b3 in the period from 2010 to 2016. Calegari 2000 first divided discretionary accruals based on the level of conformity to tax law. Booktax conformity and reporting behavior a quasiexperiment. Opponents argue that earnings quality will decline. Using publicly available financial statements from 1994 to 2007 for 16,739 firms across 32 countries, i construct a new proxy for mandatory conformity and document that high book tax conformity is associated with lower levels of earnings management and tax avoidance.
The relationship between the management of book income and. We find, however, that increasing booktax conformity has an unintended. Distinguished lecture series arizona state university. For a sample of israeli firms that the tax authorities determined had understated their earnings to avoid taxes, we do not find evidence of an overstatement of book earnings. We expect that increased booktax conformity can reduce audit fees by simplifying tax accruals and increasing tax authorities monitoring, which reduce audit workload and audit risk, respectively. Although both one and two book systems are present in europe, european data have not been used to contribute to this debate. We argue that the decrease in earnings informativeness impacts equity holders more than debt holders because of the differences in payoff structures. Mark jackson 2015 booktax differences and future earnings changes.
Download this zew discussion paper from our ftp server. Consistent with our expectations, we find that a higher country level of required booktax conformity leads to. In particular, this reform allows firms to exercise tax accounting options independently from financial accounting. Pdf the effect of booktax conformity and tax accounting. Despite ongoing debates about the effect of booktax conformity on earnings management in consolidated statements, there is a paucity of evidence from europe, where both one. This study explores the link between earnings management and jurisdictional differences in booktax conformity. Booktax conformity, earnings persistence and the association between earnings and future cash flows.
To this end, we exploit a reform act as a quasinatural experiment which implied a decrease in booktax conformity in germany in 2010. In contrast, the booktax difference represents the spread between the book income and taxable income a firm reports and is measured at the firm level. This article aims to investigate the incremental value of booktax differences btd for the future earnings post the egyptian revolution crisis and also. Tax effects of booktax conformity, financial reporting. Booktax conformity, earnings persistence and the association. We quantify the degree of taxinduced earnings management associated with statutory tax rates and examine whether greater booktax conformity alters this particular type of earnings management. Pdf booktax conformity and earnings management in brazil.
This research analyzed 22 countries between 2006 and 2016 and applied tangs 2014 model, which aims to evaluate the association between btd, earnings management em, tax avoidance ta and its interaction term. Christoph watrin, nadine ebert, and martin thomsen 2014 booktax conformity and earnings management. Proponents argue that increased booktax conformity will reduce aggressive. We find evidence suggesting that taxable income management is not related to book income management in firms operating under a moderate level of book tax conformity. Book tax conformity for corporate income 103 compelling because it could contribute to the transparency of the tax system. This paper fills this gap by examining whether high book tax conformity curtails earnings management and tax avoidance activities in an international setting. Jae journal of accounting and economics vol 50, issue 1. Booktax conformity and the information content of earnings. We examine the effect of increased booktax conformity on corporate capital structure. Proponents argue that increased book tax conformity will reduce aggressive financial reporting because managing earnings up increases taxes and will curtail abusive tax shelters because managing taxes down decreases earnings reported to shareholders.
Effects of ifrs adoption on taxinduced incentives for. The association between booktax conformity and earnings management abstract there is an ongoing debate in the literature about the costs and benefits of conforming book and taxable income in the us. There is an ongoing debate in the literature about the costs and benefits of conforming book and taxable income. Increasing the degree of conformity between accounting earnings and taxable income has been put forth as a way of curtailing both earnings management and aggressive tax planning. We investigate the role of booktax conformity in firms financial reporting activities using a unique set of publicly traded. Booktax conformity and reporting behavior econstor.
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