Reassessing the Role of Book-Tax Conformity

45 Pages Posted: 28 Mar 2007 Last revised: 23 Apr 2009

See all articles by Igor Goncharov

Igor Goncharov

Lancaster University - Department of Accounting and Finance

Joerg R. Werner

Frankfurt School of Finance & Management - Accounting Department

Date Written: April 21, 2009

Abstract

Book-tax conformity refers to the legal link between financial and tax accounts, and is an institutional feature of many continental European countries and countries like Japan that follow continental European traditions. Many studies argue that book-tax conformity impedes earnings informativeness. However, book-tax-conformity is required for single accounts but not for group accounts, which are used to inform capital markets. Previous research has not properly used this distinction. The absence of a formal link between group income and taxable income makes a causal empirical relationship between legal book-tax conformity and resulting cross-country differences in group earnings properties much less compelling. We argue that studies documenting this relationship suffer either from an omitted variable problem (i.e., failure to sufficiently control for differences in reporting incentives) or sample selection bias (inclusion/noninclusion of single accounts in the test sample). We reassess cross-country differences in asymmetric earnings timeliness and find that legal book-tax conformity does not affect cross-country differences in group earnings properties when the institutional environment is adequately controlled for. Instead, group accounting follows typical reporting incentives even in countries where there is high book-tax conformity for single accounts. Furthermore, we show that even “tax-dominated” single accounts are responsive to nontax reporting incentives.

Keywords: Consolidation, Accounting Conservatism, Book-Tax Conformity, Legal System

JEL Classification: G18, G32, H25, K22, M41

Suggested Citation

Goncharov, Igor and Werner, Jörg Richard, Reassessing the Role of Book-Tax Conformity (April 21, 2009). Available at SSRN: https://ssrn.com/abstract=975504 or http://dx.doi.org/10.2139/ssrn.975504

Igor Goncharov (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

Jörg Richard Werner

Frankfurt School of Finance & Management - Accounting Department ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany

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