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The impact of increased disclosure requirements and the standardization of accounting practices on earnings management through the reserve for income taxes

Author

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  • Richard Cazier

    (Texas Christian University)

  • Sonja Rego

    (Indiana University)

  • Xiaoli Tian

    (The Ohio State University)

  • Ryan Wilson

    (University of Oregon)

Abstract

We examine whether the regulatory changes required by the Sarbanes–Oxley Act of 2002 (SOX) and Financial Accounting Standards Board Interpretation No. (FIN) 48 reduced the propensity for earnings management through the reserve for income taxes. Given prior evidence that firms use this reserve to manage earnings to beat the consensus analyst forecast, the regulatory changes implemented by both SOX and FIN 48 allow us to study the effects of accounting regulation on earnings management. We find that neither SOX nor FIN 48 reduced earnings management through the reserve for income taxes. Thus, in contrast to research that examines whether SOX affected nontax, accrual-based earnings management, our results suggest managers continue to take advantage of their discretion over the accounting for income taxes to beat the consensus analyst forecast in both the post-SOX and post-FIN 48 periods.

Suggested Citation

  • Richard Cazier & Sonja Rego & Xiaoli Tian & Ryan Wilson, 2015. "The impact of increased disclosure requirements and the standardization of accounting practices on earnings management through the reserve for income taxes," Review of Accounting Studies, Springer, vol. 20(1), pages 436-469, March.
    • Handle: RePEc:spr:reaccs:v:20:y:2015:i:1:d:10.1007_s11142-014-9302-y
    DOI: 10.1007/s11142-014-9302-y
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    Keywords

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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