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

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  • 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.

Suggested Citation

  • Atwood, T.J. & Drake, Michael S. & Myers, Linda A., 2010. "Book-tax conformity, earnings persistence and the association between earnings and future cash flows," Journal of Accounting and Economics, Elsevier, vol. 50(1), pages 111-125, May.
    • Handle: RePEc:eee:jaecon:v:50:y:2010:i:1:p:111-125
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