Applications of Book-Tax Difference in Accounting and Finance Research

Nan-Ting Kuo and Shang-En Yu
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Nan-Ting Kuo: Shandong University of Technology, Business School
Shang-En Yu: Jimei University

Chapter 104 in Encyclopedia of Finance, 2022, pp 2539-2555 from Springer

Abstract: Abstract The difference between book income and taxable income or book-tax difference has received considerable interests from both the literature and policymakers. In this chapter we discuss the concept of book-tax difference and its empirical measures and we also review the literature exploring the information contained in book-tax differences. Prior studies consistently find that book-tax differences are informative about earnings management and tax avoidance behaviors. In addition, we also discuss the concept of book-tax conformity and its empirical measures, where it is a country-level factor in contrast to book-tax difference that is firm specific. The idea of book-tax conformity is highly related to that of book-tax differences because increasing book-tax conformity is a usually claimed means to curb the growing trend of book-tax differences as well as hinder the behind earnings management or tax avoidance behaviors. Prior literature suggests that increasing book-tax conformity may incur substantial costs in decreasing the informativeness of accounting earnings and it is debated about whether book-tax conformity can deter earnings management, while these question the potential benefits of increasing book-tax conformity.

Keywords: Book-Tax Difference; Book-Tax Conformity; Book Income; Taxable Income; Tax Rules; Accounting Standards (search for similar items in EconPapers)
JEL-codes: K34 M41 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/978-3-030-91231-4_107

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