Consistency of Book-Tax Differences and the Information Content of Earnings
Linda H. Chen
Washington State University
Dan S. Dhaliwal
University of Arizona - Department of Accounting
Mark A. Trombley
University of Arizona - Eller College of Management
September 1, 2012
The Journal of the American Taxation Association: Fall 2012, Vol. 34, No. 2, pp. 93-116.
This paper examines the effect of tax planning and earnings management on the informativeness of book income and taxable income. We conduct two sets of tests documenting (1) the incremental effect of tax planning and earnings management on the informativeness of book and taxable income and (2) the relation between the consistency of the book-tax difference and the informativeness of book and taxable income. The consistency of the book-tax difference depends on firm decisions regarding incremental earnings management and tax planning. Consistency of the book-tax difference is measured as the standard deviation of the discretionary component of the difference between book income and taxable income. Our results show that consistency of the book-tax difference, as a measure of the joint effect of earnings management and tax planning, is related to persistence of both book and tax income and has an incremental effect on information content of both book income and taxable income.
Number of Pages in PDF File: 39
Keywords: earnings management, taxable income, book income, information content
JEL Classification: G12, G32, H24, H25Accepted Paper Series
Date posted: April 1, 2012 ; Last revised: October 29, 2012
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