Tax Avoidance and Accounting Conservatism
44 Pages Posted: 2 Feb 2018
Date Written: February 1, 2018
This study analyzes the relation between accounting conservatism, future tax rate cuts and countries’ level of book-tax conformity. Firms have an incentive to increase conservatism in ﬁnancial reporting when a tax rate cut is imminent to shift taxable income into the lower taxed future. Using a panel of ﬁrms across 18 countries from 1995 to 2010 I ﬁnd that conditional conservatism is positively and signiﬁcantly associated with future tax rate cuts when book-tax conformity is high. This eﬀect is particularly pronounced for ﬁrms that concentrate the majority of their operations in the country in which the tax rate is cut. In contrast, there is no signiﬁcant relation between future tax rate cuts and unconditional conservatism.
Keywords: accounting conservatism, tax rate cuts, book-tax conformity
JEL Classification: H21, H25, M4, M41
Suggested Citation: Suggested Citation