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Earnings Management, Corporate Tax Shelters, and Book–Tax Alignment

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  • Desai, Mihir A.
  • Dharmapala, Dhammika

Abstract

This paper reviews recent evidence analyzing the link between earnings management and corporate tax avoidance and considers the implications for how policymakers should evaluate the financial reporting environment facing firms. A real–world tax shelter is dissected to illustrate how tax shelter products enable managers to manipulate reported earnings. A stylized example is developed that generalizes this view of corporate tax avoidance and empirical evidence consistent with this view is discussed. This view of corporate tax avoidance implies that shareholders and policymakers should question the rationale for distinct financial reports and that greater book–tax alignment may have mutually beneficial effects for investors and tax authorities.

Suggested Citation

  • Desai, Mihir A. & Dharmapala, Dhammika, 2009. "Earnings Management, Corporate Tax Shelters, and Book–Tax Alignment," National Tax Journal, National Tax Association, vol. 62(1), pages 169-186, March.
  • Handle: RePEc:ntj:journl:v:62:y:2009:i:1:p:169-86
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    Citations

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    Cited by:

    1. Masanori Orihara, "undated". "Stock market listing and corporate tax aggressiveness: Evidence from legal reforms in squeeze out in Japan," Discussion papers ron270, Policy Research Institute, Ministry of Finance Japan.
    2. Andrew Ellul & Tullio Jappelli & Marco Pagano & Fausto Panunzi, 2016. "Transparency, Tax Pressure, and Access to Finance," Review of Finance, European Finance Association, vol. 20(1), pages 37-76.
    3. repec:eee:riibaf:v:42:y:2017:i:c:p:1164-1172 is not listed on IDEAS
    4. repec:eee:jfinec:v:124:y:2017:i:3:p:441-463 is not listed on IDEAS
    5. Dharmapala, Dhammika & Riedel, Nadine, 2013. "Earnings shocks and tax-motivated income-shifting: Evidence from European multinationals," Journal of Public Economics, Elsevier, vol. 97(C), pages 95-107.
    6. Jaafar, Aziz & Thornton, John, 2015. "Tax Havens and Effective Tax Rates: An Analysis of Private versus Public European Firms," The International Journal of Accounting, Elsevier, vol. 50(4), pages 435-457.
    7. Ge, Wenxia & Kim, Jeong-Bon & Li, Tiemei & Li, Yutao, 2016. "Offshore operations and bank loan contracting: Evidence from firms that set up subsidiaries in offshore financial centers," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 335-355.
    8. Michał Kałdoński, 2015. "Unikanie opodatkowania w firmach rodzinnych notowanych na Giełdzie Papierów Wartościowych w Warszawie," Gospodarka Narodowa, Warsaw School of Economics, issue 2, pages 79-111.
    9. Dane M. Christensen & Dan S. Dhaliwal & Steven Boivie & Scott D. Graffin, 2015. "Top management conservatism and corporate risk strategies: Evidence from managers' personal political orientation and corporate tax avoidance," Strategic Management Journal, Wiley Blackwell, vol. 36(12), pages 1918-1938, December.
    10. Utkir Kholbadalov, 2012. "The relationship of corporate tax avoidance, cost of debt and institutional ownership: evidence from Malaysia," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 2, pages 1-1, December.
    11. Richardson, Grant & Taylor, Grantley, 2015. "Income Shifting Incentives and Tax Haven Utilization: Evidence from Multinational U.S. Firms," The International Journal of Accounting, Elsevier, vol. 50(4), pages 458-485.
    12. Allen, Arthur & Francis, Bill B. & Wu, Qiang & Zhao, Yijiang, 2016. "Analyst coverage and corporate tax aggressiveness," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 84-98.

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