Tax-induced earnings management and book-tax conformity: International evidence from unconsolidated accounts

Sebastian Eichfelder, Martin Jacob, Nadine Kalbitz and Kelly Wentland

No 252, arqus Discussion Papers in Quantitative Tax Research from arqus - Arbeitskreis Quantitative Steuerlehre

Abstract: We quantify the degree of tax-induced earnings management associated with statutory tax rates and examine whether greater book-tax conformity alters this particular type of earnings management. We first validate a new empirical approach for examining tax-induced earnings management using European unconsolidated financial and ownership information over 2005-2013. We provide robust evidence of significant tax-induced earnings management in both domestic and multinational firms. In particular, the results suggest that a 10 percentage point increase in the corporate tax rate relates to an 8.2 percent decrease in pre-tax book income. We then document that firms in countries with greater book-tax conformity engage in additional tax-induced earnings management. This is important given that it contrasts with prior literature, which does not find an effect for book-tax conforming transactions with a change in conformity.

Keywords: tax-induced earnings management; book-tax conformity; conforming tax avoidance (search for similar items in EconPapers)
JEL-codes: H25 H26 M41 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-eur, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:arqudp:252

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