Research in Accounting for Income Taxes

Abstract:     
This paper provides a comprehensive review of Accounting for Income Taxes (AFIT). The first half of the paper provides background and a primer on AFIT. The second half reviews existing studies in detail and makes suggestions for future research. We emphasize the research questions that have been addressed (most of it related to whether the tax accounts are used to manage earnings, and whether the tax accounts are priced in capital markets) and also highlight the areas that to date have not received much research attention. We draw six broad conclusions regarding AFIT research: (1) a comprehensive theoretical framework for interpreting and guiding empirical AFIT studies does not exist; (2) an apparent inconsistency exists between empirical findings that suggest the tax information in the financial statements is useful and the practitioner view that the data are of poor quality; (3) future research should study the disaggregated components of book-tax differences to better explain the underlying causes; (4) we need to better understand whether some empirical findings imply market inefficiency or whether they are driven by market imperfections; (5) the extant empirical research does not take full advantage of panel data econometric techniques and hence it is likely that some of the existing results are overstated; and (6) research opportunities may present themselves as the U.S. moves toward IFRS.

Keywords: accounting for income taxes, accounting, taxes, earnings management, asset pricing

JEL Classifications: G12, H25, M41

Working Paper Series