Tax Reporting Aggressiveness and its Relation to Aggressive Financial Reporting

49 Pages Posted: 2 Feb 2005 Last revised: 15 May 2014

Mary Margaret Frank

University of Virginia - Darden School of Business

Luann J. Lynch

University of Virginia - Darden School of Business

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: July 22, 2008

Abstract

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

Frank, Mary Margaret and Lynch, Luann J. and Rego, Sonja O., Tax Reporting Aggressiveness and its Relation to Aggressive Financial Reporting (July 22, 2008). Accounting Review, Vol. 84, No. 2, 2009. Available at SSRN: https://ssrn.com/abstract=647604 or http://dx.doi.org/10.2139/ssrn.647604

Mary Margaret Frank

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4432 (Phone)
434-243-5021 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/frank.htm

Luann J. Lynch

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4721 (Phone)
434-243-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lynch.htm

Sonja O. Rego (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)

HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

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