An Unintended Consequence of Book-Tax Conformity: A Loss of Earnings Informativeness

Posted: 8 Oct 2008

See all articles by Michelle Hanlon

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Edward L. Maydew

University of North Carolina at Chapel Hill

Terry J. Shevlin

University of California-Irvine

Date Written: August 19, 2008

Abstract

Increasing the conformity between accounting earnings and taxable income has been proposed to improve financial reporting and curtail aggressive tax planning. We find, however, that increasing conformity results in earnings that are less informative. Our inquiry exploits a unique sample of firms forced to change from the cash method to the accrual method for tax purposes, thereby increasing their book-tax conformity. We find that these firms experienced a decrease in earnings informativeness compared to control firms unaffected by the change. To our knowledge this is the first evidence of tax law changes affecting the informativeness of accounting earnings.

Keywords: book-tax conformity, earnings informativeness

JEL Classification: H25, M41, G12, D82

Suggested Citation

Hanlon, Michelle and Maydew, Edward L. and Shevlin, Terry J., An Unintended Consequence of Book-Tax Conformity: A Loss of Earnings Informativeness (August 19, 2008). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1280509

Michelle Hanlon (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-668
Cambridge, MA 02142
United States
617-253-9849 (Phone)

Edward L. Maydew

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

Terry J. Shevlin

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

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