Earnings Management, Corporate Tax Shelters, and Book-Tax Alignment
University of Chicago Law School
Mihir A. Desai
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
January 19, 2009
HBS Finance Working Paper No. 884812
This paper reviews recent evidence analyzing the link between earnings management and corporate tax avoidance and considers the implications for how policymakers should evaluate the financial reporting environment facing firms. A real-world tax shelter is dissected to illustrate how tax shelter products enable managers to manipulate reported earnings. A stylized example is developed that generalizes this view of corporate tax avoidance and empirical evidence consistent with this view is discussed. This view of corporate tax avoidance implies that shareholders and policymakers should question the rationale for distinct financial reports and that greater book-tax alignment may have mutually beneficial effects for investors and tax authorities.
Number of Pages in PDF File: 24
Keywords: Earnings management, Tax avoidance, Tax shelters; Book-tax conformity
JEL Classification: G30, H25, H26, J33, M41, M43
Date posted: February 28, 2006 ; Last revised: January 21, 2009
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