Tax Reporting Aggressiveness and its Relation to Aggressive Financial Reporting
49 Pages Posted: 2 Feb 2005 Last revised: 15 May 2014
Date Written: July 22, 2008
We investigate the association between aggressive tax and financial reporting and find a strong, positive relation. Our results suggest that insufficient costs exist to offset financial and tax reporting incentives, such that nonconformity between financial accounting standards and tax law allows firms to manage book income upward and taxable income downward in the same reporting period. To examine the relation between these aggressive reporting behaviors, we develop a measure of tax reporting aggressiveness that statistically detects tax shelter activity as least as well as, and often better than, other measures. In supplemental stock returns analyses, we confirm that the market overprices financial reporting aggressiveness. We also find that the market overprices tax reporting aggressiveness, but only for firms with the most aggressive financial reporting.
Keywords: Tax reporting aggressiveness, tax shelters, book-tax differences, financial reporting aggressiveness, earnings management, discretionary accruals
JEL Classification: M41, M49, H25
Suggested Citation: Suggested Citation