Keywords

book-tax conformity, book-tax differences, usefulness of earnings, earnings persistence, future cash flows

Abstract

Calls for eliminating differences between accounting earnings and taxable income in the U.S. have been debated extensively. Proponents of increased book-tax conformity argue that tax compliance will increase and earnings quality will improve. Opponents argue that earnings quality will decline. We examine whether the level of required book-tax conformity affects earnings persistence and the association between earnings and future cash flows. We develop a comprehensive book-tax conformity measure and find that earnings have lower persistence and a lower association with future cash flows when conformity is higher. Our evidence suggests that increased book-tax conformity may reduce earnings quality.

Original Publication Citation

Atwood, T. J. and Drake, Michael S. and Myers, Linda A., Book-Tax Conformity, Earnings Persistence and the Association Between Earnings and Future Cash Flows. Journal of Accounting and Economics 50 (1), 2010. Available at SSRN: https://ssrn.com/abstract=1138246

Document Type

Peer-Reviewed Article

Publication Date

2010

Publisher

Journal of Accounting and Economics

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

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