The Financial and Tax Reporting of Firms in Financial Transitory Loss Years

Abstract

I find evidence to indicate firms in a financial transitory loss year not only engage in financial reporting aggression by taking a financial bath but also simultaneously engage in tax reporting aggression by taking a tax dive. Further, I find a significantly positive association between taking a “financial bath” and a “tax dive” for firms in a financial transitory loss year. Conversely, I find evidence to suggest firms in a financial persistent loss year will neither take a bath nor a tax dive suggesting that financial reporting aggression and tax reporting aggression varies among loss firms conditioning on the probability of loss reversal.