Financial Accounting Effects of Tax Aggressiveness: Contracting and Measurement

Abstract

This study examines a setting in which a tax reporting decision is delegated to a …firm’'s tax manager. Using financial accounting measures of tax expense to evaluate the tax manager allows the fi…rm to efficiently attain the level of tax avoidance it prefers, despite the fact that the consequences of the tax reporting decision will occur in the future. The study also examines how well two accounting measures of tax aggressiveness -- –cash taxes paid and the unrecognized tax bene…fit -- distinguish between conservative and aggressive fi…rms.

Keywords: FIN 48, tax reporting, contracting, unrecognized tax benefits, book income tax expense

JEL Classification: H25, M41