An unintended consequence of book-tax conformity: A loss of earnings informativeness

Michelle Hanlon, Edward L. Maydew and Terry Shevlin

Journal of Accounting and Economics, 2008, vol. 46, issue 2-3, pages 294-311

Abstract: Increasing the conformity between accounting earnings and taxable income has been proposed to improve financial reporting and curtail aggressive tax planning. We find, however, that increasing conformity results in earnings that are less informative. Our inquiry exploits a unique sample of firms forced to change from the cash method to the accrual method for tax purposes, thereby increasing their book-tax conformity. We find that these firms experienced a decrease in earnings informativeness compared to control firms unaffected by the change. To our knowledge, this is the first evidence of tax law changes affecting the informativeness of accounting earnings.

Keywords: Book-tax; conformity; Earnings; informativeness; Earnings; management; Tax; aggressiveness (search for similar items in EconPapers)
Date: 2008

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Persistent link: http://EconPapers.repec.org/RePEc:eee:jaecon:v:46:y:2008:i:2-3:p:294-311

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Journal of Accounting and Economics is edited by J. L. Zimmerman, S. P. Kothari, T. Z. Lys and R. L. Watts

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