Evidence for the Possible Information Loss of Conforming Book Income and Taxable Income
Recent corporate accounting reporting scandals and aggressive corporate tax shelters have led for calls for regulatory reform. One such call is to conform (or reduce the gap between) the calculation of book and taxable income. Proponents of conformity focus on perceived benefits while ignoring possible costs. We examine one possible cost: the loss in information content to investors if one measure is removed from the information set. We provide evidence for this possible loss by examining the relative and incremental information content over the past 20 years of book and (estimated) taxable income for a large sample of firms. We find that book income exhibits significantly greater relative explanatory power, while both exhibit significant incremental explanatory power. Conforming the two measures at a minimum results in the loss of incremental explanatory power and, if book income is conformed to the tax rules, a 50 percent loss in the explanatory power of earnings.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Plesko, George & Mills, Lillian, 2003.
"Bridging the Reporting Gap: A Proposal for More Informative Reconciling of Book and Tax Income,"
4289-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Mills, Lillian F. & Plesko, George A., 2003. "Bridging the Reporting Gap: A Proposal for More Informative Reconciling of Book and Tax Income," National Tax Journal, National Tax Association, vol. 56(4), pages 865-893, December.
- Plesko, George A., 2003. "An evaluation of alternative measures of corporate tax rates," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 201-226, June.
- Shackelford, Douglas A. & Shevlin, Terry, 2001. "Empirical tax research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 321-387, September.
- Plesko, George A., 2004. "Corporate Tax Avoidance and the Properties of Corporate Earnings," National Tax Journal, National Tax Association, vol. 57(3), pages 729-737, September.
- Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
- McGill, Gary A. & Outslay, Edmund, 2004. "Lost in Translation: Detecting Tax Shelter Activity in Financial Statements," National Tax Journal, National Tax Association, vol. 57(3), pages 739-756, September.
- Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
- Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
- Hanlon, Michelle, 2003. "What Can We Infer About a Firm’s Taxable Income From Its Financial Statements?," National Tax Journal, National Tax Association, vol. 56(4), pages 831-863, December.
- Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 39-67, December.
When requesting a correction, please mention this item's handle: RePEc:ucp:jlawec:y:2005:v:48:i:2:p:407-42. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division)
If references are entirely missing, you can add them using this form.