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

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/jae

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