Review of Accounting Studies

, Volume 20, Issue 1, pp 141–172 | Cite as

The association between book-tax conformity and earnings management

Article

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 

JEL Classification

H20 H25 M41 

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  • Bradley Blaylock
    • 1
  • Fabio Gaertner
    • 2
  • Terry Shevlin
    • 3
  1. 1.Spears School of BusinessOklahoma State University-StillwaterStillwaterUSA
  2. 2.Wisconsin School of BusinessUniversity of Wisconsin-MadisonMadisonUSA
  3. 3.Merage School of BusinessUniversity of California-IrvineIrvineUSA

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