Book-Tax Conformity, Earnings Persistence and the Association Between Earnings and Future Cash Flows
41 Pages Posted: 5 Nov 2007 Last revised: 14 Mar 2010
Date Written: September 2009
Calls for eliminating differences between accounting earnings and taxable income in the U.S. have been debated extensively. Proponents of increased book-tax conformity argue that tax compliance will increase and earnings quality will improve. Opponents argue that earnings quality will decline. We examine whether the level of required book-tax conformity affects earnings persistence and the association between earnings and future cash flows. We develop a comprehensive book-tax conformity measure and find that earnings have lower persistence and a lower association with future cash flows when conformity is higher. Our evidence suggests that increased book-tax conformity may reduce earnings quality.
Keywords: book-tax conformity, book-tax differences, usefulness of earnings, earnings persistence, future cash flows
JEL Classification: M41, H20, H21, H25, G15, G18
Suggested Citation: Suggested Citation