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Book-tax conformity, earnings persistence and the association between earnings and future cash flows

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Author Info

  • Atwood, T.J.
  • Drake, Michael S.
  • Myers, Linda A.

Abstract

Calls for eliminating differences between accounting earnings and taxable income in the US have been debated extensively. Proponents of increased book-tax conformity argue that tax compliance will increase and earnings quality will improve. Opponents argue that earnings quality will decline. We examine whether the level of required book-tax conformity affects earnings persistence and the association between earnings and future cash flows. We develop a comprehensive book-tax conformity measure and find that earnings have lower persistence and a lower association with future cash flows when conformity is higher. Our evidence suggests that increased book-tax conformity may reduce earnings quality.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Accounting and Economics.

Volume (Year): 50 (2010)
Issue (Month): 1 (May)
Pages: 111-125

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Handle: RePEc:eee:jaecon:v:50:y:2010:i:1:p:111-125

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Web page: http://www.elsevier.com/locate/jae

Related research

Keywords: Book-tax conformity Book-tax differences Usefulness of earnings Earnings persistence Future cash flows;

References

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  1. Lang, Mark & Lins, Karl V. & Maffett, Mark, 2009. "Transparency, Liquidity, and Valuation: International Evidence," Working Papers 09-3, University of Pennsylvania, Wharton School, Weiss Center.
  2. Michelle Hanlon & Terry Shevlin, 2005. "Book-Tax Conformity for Corporate Income: An Introduction to the Issues," NBER Chapters, in: Tax Policy and the Economy, Volume 19, pages 101-134 National Bureau of Economic Research, Inc.
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  4. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
  5. Nelson, Karen K. & Barth, Mary E. & Cram, Donald, 2001. "Accruals and the Prediction of Future Cash Flows," Research Papers 1594r, Stanford University, Graduate School of Business.
  6. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
  7. Hanlon, Michelle & Laplante, Stacie Kelley & Shevlin, Terry, 2005. "Evidence for the Possible Information Loss of Conforming Book Income and Taxable Income," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 407-42, October.
  8. Lev, Baruch, 1983. "Some economic determinants of time-series properties of earnings," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 31-48, April.
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  10. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
  11. Ball, Ray & Kothari, S. P. & Robin, Ashok, 2000. "The effect of international institutional factors on properties of accounting earnings," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 1-51, February.
  12. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
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  14. Hanlon, Michelle & Maydew, Edward L. & Shevlin, Terry, 2008. "An unintended consequence of book-tax conformity: A loss of earnings informativeness," Journal of Accounting and Economics, Elsevier, vol. 46(2-3), pages 294-311, December.
  15. Mihir A. Desai, 2005. "The Degradation of Reported Corporate Profits," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 171-192, Fall.
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Citations

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Cited by:
  1. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
  2. Aaron Crabtree & Thomas Kubick, 2014. "Corporate tax avoidance and the timeliness of annual earnings announcements," Review of Quantitative Finance and Accounting, Springer, vol. 42(1), pages 51-67, January.
  3. Tang, Tanya Y.H. & Firth, Michael, 2012. "Earnings Persistence and Stock Market Reactions to the Different Information in Book-Tax Differences: Evidence from China," The International Journal of Accounting, Elsevier, vol. 47(3), pages 369-397.
  4. Graham, John R. & Raedy, Jana S. & Shackelford, Douglas A., 2012. "Research in accounting for income taxes," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 412-434.
  5. Karampinis, Nikolaos I. & Hevas, Dimosthenis L., 2013. "Effects of IFRS Adoption on Tax-induced Incentives for Financial Earnings Management: Evidence from Greece," The International Journal of Accounting, Elsevier, vol. 48(2), pages 218-247.
  6. Yutaro Murakami Author_Email: murakami@kbs.keio.ac.jp & Yasuhiro Ohta, 2011. "Conformity Or Decoupling: A Comparative Analysis Of Different Tax Regimes," 2nd International Conference on Business and Economic Research (2nd ICBER 2011) Proceeding 2011-268, Conference Master Resources.

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