The association between book-tax conformity and earnings management

Bradley Blaylock (), Fabio Gaertner () and Terry Shevlin ()
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Bradley Blaylock: Oklahoma State University-Stillwater
Fabio Gaertner: University of Wisconsin-Madison
Terry Shevlin: University of California-Irvine

Review of Accounting Studies, 2015, vol. 20, issue 1, No 5, 172 pages

Abstract: Abstract There is an ongoing debate in the literature about the costs and benefits of conforming book and taxable income. Proponents argue that increased book-tax conformity will reduce aggressive financial reporting: managing earnings up increases taxes and will curtail abusive tax shelters because managing taxes down decreases earnings reported to shareholders. We use a panel of 139,536 firm-year observations across 34 countries over the period 1996–2007 to test whether high levels of book-tax conformity are associated with less earnings management. We find that higher book-tax conformity is associated with significantly more, not less, earnings management. We conclude that one of the primary claimed benefits of increasing book-tax conformity, more truthful financial reporting with less earnings management, is unlikely to be as large as previously thought.

Keywords: Book-tax conformity; Earnings management; Earnings smoothing; Discretionary accruals (search for similar items in EconPapers)
JEL-codes: H20 H25 M41 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11142-014-9291-x

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