Book-tax conformity, earnings persistence and the association between earnings and future cash flows

Calls for eliminating differences between accounting earnings and taxable income in the US have been debated extensively. Proponents of increased book-tax conformity argue that tax compliance will increase and earnings quality will improve. Opponents argue that earnings quality will decline. We exam...

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Bibliographic Details
Published in:Journal of accounting & economics 2010-05, Vol.50 (1), p.111-125
Main Authors: Atwood, T.J., Drake, Michael S., Myers, Linda A.
Format: Article
Language:English
Subjects:
Accounting
Accounting methods
Accounting standards
Book-tax conformity
Book-tax conformity Book-tax differences Usefulness of earnings Earnings persistence Future cash flows
Book-tax differences
Business accounting
Cash flow
Compliance
Conformity
Correlation analysis
Earnings
Earnings persistence
Financial accounting
Financial reporting
Future cash flows
Studies
Taxable income
Usefulness of earnings
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Summary:Calls for eliminating differences between accounting earnings and taxable income in the US have been debated extensively. Proponents of increased book-tax conformity argue that tax compliance will increase and earnings quality will improve. Opponents argue that earnings quality will decline. We examine whether the level of required book-tax conformity affects earnings persistence and the association between earnings and future cash flows. We develop a comprehensive book-tax conformity measure and find that earnings have lower persistence and a lower association with future cash flows when conformity is higher. Our evidence suggests that increased book-tax conformity may reduce earnings quality.
ISSN:0165-4101
1879-1980
DOI:10.1016/j.jacceco.2009.11.001