Abstract

http://ssrn.com/abstract=2320808
 
 

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Measuring Income Tax Accrual Quality


Preeti Choudhary


Georgetown University

Allison Koester


Georgetown University

Terry J. Shevlin


University of California-Irvine

May 5, 2015

Forthcoming in Review of Accounting Studies

Abstract:     
This paper develops and validates a measure of tax accrual quality. Tax accrual quality captures variation in the extent to which the income tax accrual maps into income tax-related cash flows, with lower variation indicating a higher quality tax accrual. Low tax accrual quality arises from (1) management estimation error and (2) financial reporting standards that lead to differences between income tax expense and income tax cash flows not captured by deferred tax assets and liabilities. We validate our tax accrual quality measure by showing it is associated with firm characteristics that capture both constructs and by demonstrating it predicts future tax-related restatements and internal control material weaknesses. We also illustrate the importance of our measure by showing that investors view tax expense as more informative in firms with better tax accrual quality. Our empirical results are incremental to controlling for working capital accruals quality and measures of tax avoidance, tax risk, and tax-related earnings management. Future researchers can use tax accrual quality to address questions related to estimation error in the income tax account.

Number of Pages in PDF File: 66

Keywords: tax accrual quality; accounting for income taxes

JEL Classification: M41


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Date posted: September 6, 2013 ; Last revised: May 19, 2015

Suggested Citation

Choudhary, Preeti and Koester, Allison and Shevlin, Terry J., Measuring Income Tax Accrual Quality (May 5, 2015). Forthcoming in Review of Accounting Studies . Available at SSRN: http://ssrn.com/abstract=2320808 or http://dx.doi.org/10.2139/ssrn.2320808

Contact Information

Preeti Choudhary
Georgetown University ( email )
McDonough School of Business
Washington, DC 20057
United States

Allison Koester (Contact Author)
Georgetown University ( email )
McDonough School of Business
Washington, DC 20057
United States
202.687.6461 (Phone)
HOME PAGE: http://explore.georgetown.edu/people/apk29/

Terry J. Shevlin
University of California-Irvine ( email )
Paul Merage School of Business
Irvine, CA 92697-3125
United States
206-550-9891 (Phone)
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