Tax-Induced Earnings Management and Book-Tax Conformity: International Evidence from Unconsolidated Accounts

45 Pages Posted: 15 Feb 2020

See all articles by Sebastian Eichfelder

Sebastian Eichfelder

Otto-von-Guericke-Universität Magdeburg

Martin Jacob

WHU - Otto Beisheim School of Management

Nadine Kalbitz

affiliation not provided to SSRN

Kelly Wentland

George Mason University - Department of Accounting

Date Written: January 21, 2020

Abstract

We quantify the degree of tax-induced earnings management associated with statutory tax rates and examine whether greater book-tax conformity alters this particular type of earnings management. We first validate a new empirical approach for examining tax-induced earnings management using European unconsolidated financial and ownership information over 2005–2013. We provide robust evidence of significant tax-induced earnings management in both domestic and multinational firms. In particular, the results suggest that a 10 percentage point increase in the corporate tax rate relates to an 8.2 percent decrease in pre-tax book income. We then document that firms in countries with greater book-tax conformity engage in additional tax-induced earnings management. This is important given that it contrasts with prior literature, which does not find an effect for book-tax conforming transactions with a change in conformity.

Keywords: tax-induced earnings management, book-tax conformity, conforming tax avoidance

JEL Classification: H25, H26, M41

Suggested Citation

Eichfelder, Sebastian and Jacob, Martin and Kalbitz, Nadine and Wentland, Kelly, Tax-Induced Earnings Management and Book-Tax Conformity: International Evidence from Unconsolidated Accounts (January 21, 2020). Available at SSRN: https://ssrn.com/abstract=3523388 or http://dx.doi.org/10.2139/ssrn.3523388

Sebastian Eichfelder (Contact Author)

Otto-von-Guericke-Universität Magdeburg ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
Germany
0391-67-18811 (Phone)

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

Nadine Kalbitz

affiliation not provided to SSRN

Kelly Wentland

George Mason University - Department of Accounting

Fairfax, VA
United States

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