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Can Book-Tax Differences Capture Earnings Management and Tax Management? Empirical Evidence from China

The International Journal of Accounting, Forthcoming

49 Pages Posted: 19 Sep 2010 Last revised: 30 May 2011

Tanya Y. H. Tang

Brock University

Michael Firth

Lingnan University - Department of Finance and Insurance

Date Written: September 18, 2010

Abstract

This study investigates whether and how book-tax differences (BTDs) are related to earnings management, tax management, and their interactions in Chinese listed companies. Using unique tax-effect BTDs obtained from Chinese B-share listed firms, we find that firms with strong incentives for earnings and tax management exhibit high levels of abnormal BTDs. This suggests that BTDs can be used to capture both accounting and tax manipulations induced by managerial motivations. Our results indicate that earnings management explains 7.4% of abnormal BTDs, tax management accounts for 27.8% of abnormal BTDs, and their interaction explains 3.2% of abnormal BTDs. Tax-effect BTDs are more powerful than income-effect BTDs in capturing opportunistic reporting at both conceptual and empirical levels.

Keywords: Book-Tax Differences, Earnings Management, Tax Management, China

JEL Classification: M41, H29

Suggested Citation

Tang, Tanya Y. H. and Firth, Michael, Can Book-Tax Differences Capture Earnings Management and Tax Management? Empirical Evidence from China (September 18, 2010). The International Journal of Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1679190

Tanya Y. H. Tang (Contact Author)

Brock University ( email )

500 Glenridge Ave.
St. Catherines, On L2S 3A1
Canada

Michael Firth

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China
+852 2616 8160 (Phone)
+852 2466 4751 (Fax)

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