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The present paper investigates the effect of book-tax differences on the accounting conservatism (as a proxy for financial reporting quality). The major objective of this study was to examine the extent to which regulatory and opportunistic information in book-tax differences influence accounting conservatism. We also aim to examine if book-tax differences are a signal of “bad news” for investors. Using publicly available financial statements from 2005 to 2012 for 28 Tunisian listed firms on the Tunis Stock Exchange and operating in the industrial and commercial sectors, we use a current measure for accounting conservatism and documents that observation with large book-tax differences are associated with low levels of accounting conservatism. Also, we find that firms with abnormal book-tax differences and normal book-tax differences exhibit less accounting conservatism. Overall, the results suggest that the total and differing components of book-tax differences have differential implications on accounting conservatism. Our research is valuable for researchers, shareholders as well as regulators. For researchers, it appears to an innovative area for future research. For shareholders, it shows the role of the information transmitted by book-tax differences into the analysis of earnings quality published by firms. This study also helps regulators to improve accounting rules and tax rule.

It is well known that the objectives of financial accounting and tax accounting sometimes conflict, resulting in book-tax differences (BTDs). In this study we test for associations between measures of BTDs and measures of market participants’ uncertainty regarding the information conveyed in financial reports. The measures of market participant uncertainty are: (1) share turnover, (2) analyst forecast dispersion, and (3) stock return variance. We find positive associations between levels and variability of total BTDs and the three measures. After disaggregating BTDs into their permanent and temporary components, we find that both are positively associated with market uncertainty, although the permanent component of BTDs is generally more strongly and consistently associated with measures of uncertainty than is the temporary component. We interpret these results, in part, as indicative of the possible effect of uncertainty contained in BTDs, especially permanent BTDs, on the precision of the information conveyed in the financial statements.

While financial statements are the primary source of information about a firm, they tend to be under earnings management practices, namely to avoid paying tax. Therefore, we aim to examine whether taxes still affect earning persistence in an era of prevalent digital information. For that purpose, we use book-tax differences considering the deductible temporary differences and the taxable temporary differences. In addition, we analyze which of the two earnings components are more affected by taxes, specifically cash flow or accruals. We estimate econometric regressions using panel data to test our hypotheses. Through a sample of 421 small- and medium-sized (SME) Portuguese firms, between 2016 and 2020, we found empirical evidence that earning persistence tends to be lower when deductible temporary differences increase, while taxable temporary differences produce no statically significant effect. Furthermore, our results suggest that cash flow component increases more earning persistence than accruals. Therefore, deductible temporary difference may be an indicator of earnings management activities in these firms. These results are relevant, given the potential negative consequences of earnings management for the efficient decision making of stakeholders and even more because SMEs represent a substantial number of firms in European countries, particularly in Portugal.

This paper investigates the role of temporary Book-Tax Differences(BTD) as a proxy for earnings quality using various measures to provide alternative indicators of earnings quality. Hence, it combines most frequently used hypotheses with some modifications. First, we partition total temporary BTD into its components such as large positive, large negative and small temporary BTDs. Then, we analyze the association between large temporary BTDs with discretionary accruals. Following that, the persistence of earnings will be examined when there are large positive and large negative BTDs. Lastly, the association between large temporary BTDs and future earnings will be studied to find the impact of large temporary BTDs on future earnings. Overall, the evidence suggests that temporary BTD can be a good choice for investors to analyze a particular companys earnings quality.

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 at least as well as, and often better than, other measures. In supplemental stock returns analyses, we confirm that the market overprices finacial reporting aggressiveness. We also find that the market overprices tax reporting aggressiveness, but only for firms with the most aggressive finacial reporting.

Recent evidence suggests that corporate tax shelters have become important corporate instruments for reducing tax burden. Based on a sample of identified tax shelter participants, I develop a profile of the type of firm that likely engages in tax sheltering. The model detects tax shelter participants through the use of variables predicted to be either affected by or associated with tax sheltering. I find that firms actively engaged in tax sheltering exhibit larger ex post book-tax differences and more aggressive financial reporting practices. Using this model of tax shelter firm characteristics, I identify a broad sample of predicted tax shelter firms from the population of firms. I then examine whether tax sheltering is associated with wealth creation for shareholders or with managerial opportunism. I find that active tax shelter firms with strong corporate governance exhibit positive abnormal returns. This finding is consistent with tax sheltering being a tool for wealth creation in well-governed firms.

Using confidential tax shelter and tax return data obtained from the Internal Revenue Service, this study develops and validates an expanded model for inferring the likelihood that a firm engages in a tax shelter. Results show that tax shelter likelihood is positively related to subsidiaries located in tax havens, foreign-source income, inconsistent book-tax treatment, litigation losses, use of promoters, profitability, and size, and negatively related to leverage. Supplemental tests show that total book-tax differences (BTDs) and the contingent tax liability reserve are significantly related to tax shelter usage, while discretionary permanent BTDs and long-run cash effective tax rates are not. Finally, the model is weaker, yet still significant, in the FIN 48 disclosure environment. This research provides investors and policymakers with an extended, validated measure to calculate the presence of extreme cases of corporate tax aggressiveness. Such information could also aid analysts and other tax and non-tax researchers in assessing the benefits and risks of firm behavior.

This study aims to examine the effect of tax planning, book-tax differences, and firm size on the ability of corporate earnings to persist consistently over time. Additionally, the study explores the moderating role of earnings quality in strengthening or weakening the relationships among these variables. The research was conducted on manufacturing firms listed on the Indonesia Stock Exchange over a five-year period. Employing a quantitative approach, data were obtained through documentation of publicly available financial statements. A purposive sampling technique was applied to ensure data consistency and completeness. The data analysis reveals that all three independent variables significantly influence earnings persistence, both individually and collectively. Earnings quality was found to strengthen the relationship between tax planning and earnings persistence. However, it did not exert a significant moderating effect on the relationships between book-tax differences and earnings persistence, nor between firm size and earnings persistence. These findings underscore the importance of transparency and accuracy in earnings reporting as a critical basis for investors and policymakers in assessing the long-term financial performance and stability of a firm.

Purpose This paper aims to examine the relationship between corporate social responsibility (CSR) and tax avoidance as well as how CSR and country-level governance interplay in affecting tax avoidance in an international setting. Design/methodology/approach This paper is an empirical work using listed companies from 35 countries and relying on several proxies for corporate tax avoidance activities including the difference between the statutory tax rate and the annual effective tax rate, the book-tax difference and the residual book-tax difference. Findings This study finds strong evidence that CSR is positively related to tax avoidance. It also finds that in countries with weak country-level governance, firms with higher CSR scores engage in less tax avoidance, implying that CSR and country-level governance are substitutes. Originality/value This paper is the first study that examines the relationship between CSR and tax avoidance in an international setting with different legal and institutional environment.

We investigate why temporary book-tax differences appear to serve as a useful signal of earnings persistence (Hanlon 2005). We first test and show that temporary book-tax differences provide incremental information over the magnitude of accruals for the persistence of earnings and accruals. We then opine that there are multiple potential sources of large positive book-tax differences. We predict and find that firms with large positive book-tax differences likely arising from upward earnings management (tax avoidance) exhibit lower (higher) earnings and accruals persistence than do other firms with large positive book-tax differences. Finally, we find significant variation in current-period earnings and accruals response coefficients and insignificant hedge returns in period f+1, consistent with investors being able to look through to the source of large positive book-tax differences (earnings management and tax avoidance), allowing them to correctly price the persistence of accruals for these subsamples.