Consistency of Book-Tax Differences and the Information Content of Earnings

The Journal of the American Taxation Association: Fall 2012, Vol. 34, No. 2, pp. 93-116.

39 Pages Posted: 1 Apr 2012 Last revised: 29 Oct 2012

See all articles by Linda H. Chen

Linda H. Chen

University of Idaho

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Mark A. Trombley

University of Arizona - Eller College of Management

Date Written: September 1, 2012

Abstract

This paper examines the effect of tax planning and earnings management on the 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 informativeness of book and taxable income and (2) the relation between the consistency of the book-tax difference and the informativeness of book and taxable income. The consistency of the book-tax difference depends on firm decisions regarding incremental earnings management and tax planning. Consistency of the book-tax difference is measured as the standard deviation of the discretionary component of the difference between book income and taxable income. Our results show that consistency of the book-tax difference, as a measure of the joint effect of earnings management and tax planning, is related to persistence of both book and tax income and has an incremental effect on information content of both book income and taxable income.

Keywords: earnings management, taxable income, book income, information content

JEL Classification: G12, G32, H24, H25

Suggested Citation

Chen, Linda H. and Dhaliwal, Dan S. and Trombley, Mark A., Consistency of Book-Tax Differences and the Information Content of Earnings (September 1, 2012). The Journal of the American Taxation Association: Fall 2012, Vol. 34, No. 2, pp. 93-116. , Available at SSRN: https://ssrn.com/abstract=2032593 or http://dx.doi.org/10.2139/ssrn.2032593

Linda H. Chen (Contact Author)

University of Idaho ( email )

Department of Accounting
College of Business and Economics
Moscow, ID 83944-3174
United States

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Mark A. Trombley

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-4805 (Phone)
520-621-3742 (Fax)

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