Abstract

http://ssrn.com/abstract=1656012
 
 

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Did FIN 48 Limit the Use of Tax Reserves as a Tool for Earnings Management?


Richard A. Cazier


Texas Christian University

Sonja O. Rego


Indiana University - Kelley School of Business - Department of Accounting

Xiaoli (Shaolee) Tian


Ohio State University (OSU) - Fisher College of Business

Ryan J. Wilson


University of Oregon - Lundquist College of Business

August 8, 2011


Abstract:     
We utilize new income tax reserve disclosures required under FIN 48 to examine whether managers use discretion over this accrual to manage earnings to meet the consensus analyst forecast. We find that firms with pre-managed earnings (i.e., earnings before the change in the tax reserve) that are below the consensus analyst forecast are far more likely to reduce their tax reserves and thus report higher net income. In fact, we find that 37 percent of firm-years with pre-managed earnings below the consensus forecast meet the forecast when the change in the tax reserve is included in earnings. In contrast, only 9.8 percent of firm-years with pre-managed earnings above the consensus forecast increased their tax reserves to the extent that it caused them to miss the consensus forecast. This asymmetric result is consistent with managers using their discretion over tax reserves to meet consensus analyst forecasts. Using a proxy for changes in tax reserves developed by Blouin and Tuna (2007), we also document a decline in the use of tax reserves to meet the consensus analyst forecast following the adoption of FIN 48. Nonetheless, our results using both estimated and actual changes in tax reserves clearly suggest that managers continue to use their discretion over this account to meet the consensus analyst forecast, although at a lower rate of recurrence than during the pre-FIN 48 time period.

Number of Pages in PDF File: 49

Keywords: Tax reserves, unrecognized tax benefits, FIN 48, earnings management, analyst forecasts

JEL Classification: M40, M41, M49

working papers series


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Date posted: August 9, 2010 ; Last revised: May 14, 2014

Suggested Citation

Cazier, Richard A. and Rego, Sonja O. and Tian, Xiaoli (Shaolee) and Wilson, Ryan J., Did FIN 48 Limit the Use of Tax Reserves as a Tool for Earnings Management? (August 8, 2011). Available at SSRN: http://ssrn.com/abstract=1656012 or http://dx.doi.org/10.2139/ssrn.1656012

Contact Information

Richard A. Cazier
Texas Christian University ( email )
Fort Worth, TX 76129
United States
Sonja O. Rego (Contact Author)
Indiana University - Kelley School of Business - Department of Accounting ( email )
1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)
HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

Xiaoli (Shaolee) Tian
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
Ryan J. Wilson
University of Oregon - Lundquist College of Business ( email )
1280 University of Oregon
Eugene, OR 97403
United States
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