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

See all articles by T. J. Atwood

T. J. Atwood

University of Arkansas - Department of Accounting

Michael S. Drake

Brigham Young University - Marriott School

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Date Written: September 2009

Abstract

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

Atwood, T. J. and Drake, Michael S. and Myers, Linda A., Book-Tax Conformity, Earnings Persistence and the Association Between Earnings and Future Cash Flows (September 2009). Journal of Accounting & Economics (JAE), Vol. 50, No. 1, 2010. Available at SSRN: https://ssrn.com/abstract=1138246

T. J. Atwood (Contact Author)

University of Arkansas - Department of Accounting ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Michael S. Drake

Brigham Young University - Marriott School ( email )

United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

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