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Book-tax conformity and reporting behavior: A quasi-experiment

Author

Listed:
  • Evers, Maria Theresia
  • Meier, Ina
  • Nicolay, Katharina

Abstract

We examine how a comprehensive change in book-tax conformity affects firms' reporting behavior. To this end, we exploit a Reform Act as a quasi-natural experiment which implied a decrease in book-tax conformity in Germany in 2010. In particular, this reform allows firms to exercise tax accounting options independently from financial accounting. Our study builds on a unique dataset of linked individual financial statements and actual tax return data. It covers roughly 150 incorporated firms for the years 2008 to 2012. Exploiting the exceptional change in conformity, we contribute to the ongoing debate on the impact of booktax conformity. Our results show that profitable companies, which have a clear tax sheltering incentive, actually use the newly introduced reporting leeway to manage taxable income downwards. This is especially attributable to companies exploiting favorable tax depreciation rules. Moreover, we find larger opportunistic tax reporting responses for small companies with less complex and predominantly domestic group structures. In addition, we observe that a decrease in book-tax conformity induces a decrease in the general persistence of taxable income, but at the same time gives rise to higher financial earnings persistence. This corroborates our finding of increased tax sheltering activity in post reform years.

Suggested Citation

  • Evers, Maria Theresia & Meier, Ina & Nicolay, Katharina, 2016. "Book-tax conformity and reporting behavior: A quasi-experiment," ZEW Discussion Papers 16-008, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:16008
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    References listed on IDEAS

    as
    1. Ronald B. Davies & Julien Martin & Mathieu Parenti & Farid Toubal, 2018. "Knocking on Tax Haven’s Door: Multinational Firms and Transfer Pricing," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 120-134, March.
    2. Guenther, David A. & Maydew, Edward L. & Nutter, Sarah E., 1997. "Financial reporting, tax costs, and book-tax conformity," Journal of Accounting and Economics, Elsevier, vol. 23(3), pages 225-248, November.
    3. Mihir A. Desai, 2003. "The Divergence between Book Income and Tax Income," NBER Chapters,in: Tax Policy and the Economy, Volume 17, pages 169-208 National Bureau of Economic Research, Inc.
    4. Evers, Maria Theresia & Finke, Katharina & Matenaer, Sebastian & Meier, Ina & Zinn, Benedikt, 2014. "Evidence on book-tax differences and disclosure quality based on the notes to the financial statements," ZEW Discussion Papers 14-047, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. Mihir A. Desai, 2005. "The Degradation of Reported Corporate Profits," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 171-192, Fall.
    6. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    7. Michelle Hanlon & Terry Shevlin, 2005. "Book-Tax Conformity for Corporate Income: An Introduction to the Issues," NBER Chapters,in: Tax Policy and the Economy, Volume 19, pages 101-134 National Bureau of Economic Research, Inc.
    8. Atwood, T.J. & Drake, Michael S. & Myers, Linda A., 2010. "Book-tax conformity, earnings persistence and the association between earnings and future cash flows," Journal of Accounting and Economics, Elsevier, vol. 50(1), pages 111-125, May.
    9. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
    10. Lee, Myoung-jae & Kang, Changhui, 2006. "Identification for difference in differences with cross-section and panel data," Economics Letters, Elsevier, vol. 92(2), pages 270-276, August.
    11. Hanlon, Michelle & Maydew, Edward L., 2009. "Book–Tax Conformity: Implications for Multinational Firms," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(1), pages 127-153, March.
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    13. Hanlon, Michelle & Maydew, Edward L. & Shevlin, Terry, 2008. "An unintended consequence of book-tax conformity: A loss of earnings informativeness," Journal of Accounting and Economics, Elsevier, vol. 46(2-3), pages 294-311, December.
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    More about this item

    Keywords

    book-tax conformity; book-tax differences; tax sheltering; earnings persistence;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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