Can Book-Tax Differences Capture Earnings Management and Tax Management? Empirical Evidence from China
Tanya Y. H. Tang
The University of British Columbia - Faculty of Management
Department of Finance and Insurance, Lingnan University
September 18, 2010
The International Journal of Accounting, Forthcoming
This study investigates whether and how book-tax differences (BTDs) are related to earnings management, tax management, and their interactions in Chinese listed companies. Using unique tax-effect BTDs obtained from Chinese B-share listed firms, we find that firms with strong incentives for earnings and tax management exhibit high levels of abnormal BTDs. This suggests that BTDs can be used to capture both accounting and tax manipulations induced by managerial motivations. Our results indicate that earnings management explains 7.4% of abnormal BTDs, tax management accounts for 27.8% of abnormal BTDs, and their interaction explains 3.2% of abnormal BTDs. Tax-effect BTDs are more powerful than income-effect BTDs in capturing opportunistic reporting at both conceptual and empirical levels.
Number of Pages in PDF File: 49
Keywords: Book-Tax Differences, Earnings Management, Tax Management, China
JEL Classification: M41, H29Accepted Paper Series
Date posted: September 19, 2010 ; Last revised: May 30, 2011
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