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The association between book-tax conformity and earnings management

Author

Listed:
  • Bradley Blaylock

    (Oklahoma State University-Stillwater)

  • Fabio Gaertner

    (University of Wisconsin-Madison)

  • Terry Shevlin

    (University of California-Irvine)

Abstract

There is an ongoing debate in the literature about the costs and benefits of conforming book and taxable income. Proponents argue that increased book-tax conformity will reduce aggressive financial reporting: managing earnings up increases taxes and will curtail abusive tax shelters because managing taxes down decreases earnings reported to shareholders. We use a panel of 139,536 firm-year observations across 34 countries over the period 1996–2007 to test whether high levels of book-tax conformity are associated with less earnings management. We find that higher book-tax conformity is associated with significantly more, not less, earnings management. We conclude that one of the primary claimed benefits of increasing book-tax conformity, more truthful financial reporting with less earnings management, is unlikely to be as large as previously thought.

Suggested Citation

  • Bradley Blaylock & Fabio Gaertner & Terry Shevlin, 2015. "The association between book-tax conformity and earnings management," Review of Accounting Studies, Springer, vol. 20(1), pages 141-172, March.
    • Handle: RePEc:spr:reaccs:v:20:y:2015:i:1:d:10.1007_s11142-014-9291-x
    DOI: 10.1007/s11142-014-9291-x
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    Keywords

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    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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