Tax-Induced Earnings Management and Book-Tax Conformity: International Evidence from Unconsolidated Accounts
45 Pages Posted: 15 Feb 2020
Date Written: January 21, 2020
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: Suggested Citation