The Impact of Earnings Management and Tax Planning on the Information Content of Earnings

SSRN Electronic Journal 11/2007; DOI: 10.2139/ssrn.1028808

ABSTRACT This paper examines the effect of tax planning and earnings management on the relative informativeness of book income and taxable income. We conduct two sets of tests documenting (1) the incremental effect of tax planning and earnings management on the relative informativeness of book and taxable income and (2) the relation between voluntary conformity and the relative informativeness of book and taxable income. Based on these two sets of tests, we conclude that tax planning and earnings quality jointly affect the relative informativeness of book and taxable income.

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    ABSTRACT: Prior studies document that book-tax differences (BTDs) reflect divergent reporting rules for book and tax purposes, and contain information about earnings management and tax planning. In this paper we investigate whether the regulatory and opportunistic information impounded in BTDs differentially influences earnings persistence and the earnings-returns relation. Using BTD data from China, we separate BTDs into normal BTDs (NBTDs) and abnormal BTDs (ABTDs). NBTDs are more likely driven by regulatory differences between accounting and tax rules and ABTDs are more likely driven by earnings and tax management activities. We find that firms with large positive and negative ABTDs (NBTDs) exhibit less earnings persistence compared to firms with small ABTDs (NBTDs). However, the level of earnings persistence for large unsigned ABTD firms is significantly lower than that for large unsigned NBTD firms. While large unsigned NBTDs appear to enhance the earnings-returns relation, we find no evidence that large unsigned ABTDs affect the earnings-returns relation. Overall, the results suggest that the differing components of BTDs have differential implications for earnings quality. Additional tests show that ABTDs and NBTDs can provide incremental information about earnings persistence beyond the information in discretionary accruals and total accruals, suggesting that the investigation of BTDs adds value to financial analysis.
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    ABSTRACT: This paper comprehensively reviews the Accounting for Income Taxes (AFIT). It begins by identifying four distinctive aspects of AFIT and briefly covering the rules surrounding AFIT. It then reviews the existing studies in detail and offers suggestions for future research. We emphasize the research questions that have been addressed (most of which relate to whether the tax accounts are used to manage earnings and whether the tax accounts are priced by equity market participants). We also highlight areas that have not received as much research attention or warrant future analysis.
    Journal of Accounting and Economics 03/2011; 53(1-2). DOI:10.2139/ssrn.1312005 · 3.28 Impact Factor
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    ABSTRACT: This paper reviews prior studies that provide an understanding of earnings quality concepts. It presents various definitions of earnings quality and discussed proxies used in empirical literature to measure earnings quality. Prior studies measure earnings quality by using time-series properties of earnings including earnings persistence, predictability, timeliness and volatility; relating accruals to future cash flows, associating earnings with stock market metrics such as stock prices and returns and assessing the level of discretionary accruals. The literature emphasises that the quality of earnings is very important as the earnings figure is widely used in many contractual agreements and investing decisions.
    International Conference on Governance & Strategic Management (ICGSM) 2014; 04/2014

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May 27, 2014