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Book-tax conformity and earnings management in response to tax rate cuts

Dennis Sundvik

Journal of International Accounting, Auditing and Taxation, 2017, vol. 28, issue C, 31-42

Abstract: This study explores the link between earnings management and jurisdictional differences in book-tax conformity. A dataset of national reforms lowering the corporate tax rate is used to estimate the effect of conformity on private firm’s earnings management behavior when a specific incentive to manage earnings downward exists. Total and discretionary accruals are used to measure earnings management and a continuous measure is used to assess the level of book-tax conformity. Results suggest that changes in the statutory tax rate affect firms in jurisdictions with high book-tax conformity more than firms in jurisdictions with less book-tax conformity. However, more overall earnings management is attributed to firms in low conformity jurisdictions. These findings contribute to the ongoing debate on the appropriate level of book-tax conformity.

Keywords: Earnings management; Tax incentive; Tax reform; Private firms; Book-tax conformity (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jiaata:v:28:y:2017:i:c:p:31-42

DOI: 10.1016/j.intaccaudtax.2016.12.003

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