The effect of book-tax conformity on the information environment: from the analyst perspective

Audrey Hsu () and Sophia Liu ()
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Audrey Hsu: National Taiwan University
Sophia Liu: National Taiwan University

Review of Quantitative Finance and Accounting, 2023, vol. 61, issue 2, No 5, 535-565

Abstract: Abstract This study investigates the effect of book-tax conformity on the information environment from the perspective of analysts’ forecasts. Whether book earnings and taxable income should be conformed has been extensively debated in the literature, but limited evidence is presented. Using international data across 34 countries, we examine how book-tax conformity in a country affects analyst forecast properties. The results indicate that after controlling for firm-specific and country-level factors, increased book-tax conformity is associated with a decrease in earnings forecast accuracy and increased earnings forecast dispersion. We further find that the adverse association between book-tax conformity and analyst forecast properties is mitigated when a firm has better environmental, social, and governance (ESG) performance. Overall, this study suggests that countries with higher book-tax conformity are associated with a less-favorable information environment for financial analysts while a firm’s ESG performance can help improve the information environment.

Keywords: Book-tax conformity; Analyst forecast; ESG performance (search for similar items in EconPapers)
JEL-codes: D80 G15 H20 M41 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11156-023-01160-5

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