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

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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.
Original languageEnglish
Peer-reviewed scientific journalJournal of International Accounting, Auditing and Taxation
Volume28
Pages (from-to)31-42
Number of pages12
ISSN1061-9518
DOIs
Publication statusPublished - 03.01.2017
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management
  • Earnings management
  • Tax incentive
  • Tax reform
  • Private firms
  • Book-tax conformity

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    The 51st Annual Conference of the British Accounting & Finance Association

    Dennis Sundvik (Speaker: Presenter)

    23.03.201525.03.2015

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    The 2014 Annual Doctoral Conference of the British Accounting & Finance Association

    Dennis Sundvik (Speaker: Presenter)

    13.04.201414.04.2014

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