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Journal of Accounting and Economics Vol. 50 No. 1 2010

Book-tax conformity, earnings persistence and the association between earnings and future cash flows

T. J. Atwood1,2; Michael S. Drake3,4; Linda A. Myers5,2

1 Florida State University · 2 University of Arkansas at Fayetteville · 3 Brigham Young University · 4 The Ohio State University · 5 University of Tennessee at Knoxville

Abstract

Calls for eliminating differences between accounting earnings and taxable income in the US 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.

DOI
10.1016/j.jacceco.2009.11.001
Volume
50
Issue
1
Pages
111-125
Language
en
Sources
bibtex:phds-export.bib crossref openalex

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