Taxation, Earnings management, Net operating losses, Income shifting

We investigate the role of book-tax conformity in firms' financial reporting activities using a unique set of publicly traded firms that were forced to switch for tax purposes from the cash method to the accrual method. Prior to the mandated change, little trade-off existed between tax planning and financial reporting goals for these firms. After the change, recognition criteria for tax and financial reporting purposes became more alike, increasing the trade-off between financial reporting and tax objectives. Our results suggest that required use of the accrual method for tax purposes causes firms to defer income for financial statement purposes.

This paper investigates systematic changes in the value-relevance of earnings and book values over time. We report three primary findings. First, contrary to claims in the professional literature, the combined value-relevance of earnings and book values has not declined over the past forty years and, in fact, appears to have increased slightly. Second, while the incremental value-relevance of ‘bottom line’ earnings has declined, it has been replaced by increasing value-relevance of book values. Finally, much of the shift in value-relevance fiom earnings to book values can be explained by the increasing frequency and magnitude of one-time items, the increasing frequency of negative earnings, and changes in average firm size and intangible intensity across time.