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The effects of book-tax conformity and tax accounting incentives on financial accounting: evidence from public and private limited companies in Germany

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  • Christoph Watrin
  • Christiane Pott
  • Robert Ullmann

Abstract

Using as a natural experiment, the German corporate tax rate decrease in 2001, this paper studies the effect of tax accounting incentives on financial statements in a setting where book-tax conformity is strong. We find that companies that generally balance their overall accounting strategy, i.e., they focus on tax accounting and financial accounting concurrently, are less willing to engage in tax-induced earnings management than are companies that do not focus on accounting strategy balancing. Moreover, we observe that tax accounting incentives in our natural experiment influence the earnings management behaviour of private companies but not of public companies. Our findings highlight the impact of tax accounting incentives on financial accounting when book-tax conformity is strong; therefore, these findings offer a new starting point for a sound discussion on the future of book-tax conformity.

Suggested Citation

  • Christoph Watrin & Christiane Pott & Robert Ullmann, 2012. "The effects of book-tax conformity and tax accounting incentives on financial accounting: evidence from public and private limited companies in Germany," International Journal of Accounting, Auditing and Performance Evaluation, Inderscience Enterprises Ltd, vol. 8(3), pages 274-302.
    • Handle: RePEc:ids:ijaape:v:8:y:2012:i:3:p:274-302
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    Citations

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    Cited by:

    1. Kovermann, Jost & Wendt, Martin, 2019. "Tax avoidance in family firms: Evidence from large private firms," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(2), pages 145-157.
    2. Sundvik, Dennis, 2017. "Book-tax conformity and earnings management in response to tax rate cuts," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 28(C), pages 31-42.
    3. Bernard, Darren, 2016. "Is the risk of product market predation a cost of disclosure?," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 305-325.
    4. Haga, Jesper & Höglund, Henrik & Sundvik, Dennis, 2019. "Cost behavior around corporate tax rate cuts," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 34(C), pages 1-11.
    5. Dobbins, Laura & Eichfelder, Sebastian & Hechtner, Frank & Hundsdoerfer, Jochen, 2018. "Intertemporal income shifting around a large tax cut: The case of depreciations," arqus Discussion Papers in Quantitative Tax Research 229, arqus - Arbeitskreis Quantitative Steuerlehre.
    6. Eichfelder, Sebastian & Jacob, Martin & Kalbitz, Nadine & Wentland, Kelly, 2023. "How do corporate tax rates alter conforming tax avoidance?," arqus Discussion Papers in Quantitative Tax Research 277, arqus - Arbeitskreis Quantitative Steuerlehre.
    7. Sundvik Dennis, 2017. "A review of earnings management in private firms in response to tax rate changes," Nordic Tax Journal, Sciendo, vol. 2017(1), pages 151-161, January.

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