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Earnings Management, Corporate Tax Shelters, and Book-Tax Alignment

24 Pages Posted: 28 Feb 2006 Last revised: 21 Jan 2009

Dhammika Dharmapala

University of Chicago Law School

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Date Written: January 19, 2009

Abstract

This paper reviews recent evidence analyzing the link between earnings management and corporate tax avoidance and considers the implications for how policymakers should evaluate the financial reporting environment facing firms. A real-world tax shelter is dissected to illustrate how tax shelter products enable managers to manipulate reported earnings. A stylized example is developed that generalizes this view of corporate tax avoidance and empirical evidence consistent with this view is discussed. This view of corporate tax avoidance implies that shareholders and policymakers should question the rationale for distinct financial reports and that greater book-tax alignment may have mutually beneficial effects for investors and tax authorities.

Keywords: Earnings management, Tax avoidance, Tax shelters; Book-tax conformity

JEL Classification: G30, H25, H26, J33, M41, M43

Suggested Citation

Dharmapala, Dhammika and Desai, Mihir A., Earnings Management, Corporate Tax Shelters, and Book-Tax Alignment (January 19, 2009). HBS Finance Working Paper No. 884812. Available at SSRN: https://ssrn.com/abstract=884812 or http://dx.doi.org/10.2139/ssrn.884812

Dhammika Dharmapala

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

Mihir A. Desai (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

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