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Tax Reporting Aggressiveness and its Relation to Aggressive Financial Reporting


Mary Margaret Frank


University of Virginia - Darden School of Business

Luann J. Lynch


University of Virginia - Darden School of Business

Sonja O. Rego


Indiana University - Kelley School of Business

July 22, 2008

Accounting Review, Vol. 84, No. 2, 2009

Abstract:     
We investigate the association between aggressive tax and financial reporting and find a strong, positive relation. Our results suggest that insufficient costs exist to offset financial and tax reporting incentives, such that nonconformity between financial accounting standards and tax law allows firms to manage book income upward and taxable income downward in the same reporting period. To examine the relation between these aggressive reporting behaviors, we develop a measure of tax reporting aggressiveness that statistically detects tax shelter activity as least as well as, and often better than, other measures. In supplemental stock returns analyses, we confirm that the market overprices financial reporting aggressiveness. We also find that the market overprices tax reporting aggressiveness, but only for firms with the most aggressive financial reporting.

Number of Pages in PDF File: 49

Keywords: Tax reporting aggressiveness, tax shelters, book-tax differences, financial reporting aggressiveness, earnings management, discretionary accruals

JEL Classification: M41, M49, H25

Accepted Paper Series


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Date posted: February 2, 2005 ; Last revised: March 25, 2010

Suggested Citation

Frank, Mary Margaret and Lynch, Luann J. and Rego, Sonja O., Tax Reporting Aggressiveness and its Relation to Aggressive Financial Reporting (July 22, 2008). Accounting Review, Vol. 84, No. 2, 2009. Available at SSRN: http://ssrn.com/abstract=647604 or http://dx.doi.org/10.2139/ssrn.647604

Contact Information

Mary Margaret Frank
University of Virginia (UVA) - Darden School of Business ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4432 (Phone)
434-243-5021 (Fax)
HOME PAGE: http://www.darden.virginia.edu/faculty/frank.htm
Luann J. Lynch
University of Virginia (UVA) - Darden School of Business ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4721 (Phone)
434-243-7677 (Fax)
HOME PAGE: http://www.darden.virginia.edu/faculty/lynch.htm
Sonja O. Rego (Contact Author)
Indiana University - Kelley School of Business ( 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
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