An unintended consequence of book-tax conformity: A loss of earnings informativeness

Hanlon, Michelle; Maydew, Edward L.; Shevlin, Terry

doi:10.1016/j.jacceco.2008.09.003

Cited by 181 publications

(158 citation statements)

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“…2 For example, finds that conforming book income to taxable income would result in an estimated loss of information of about 50%. Using the same setting and similar sample we use in this paper, Hanlon et al (2008) find a significant decrease in the informativeness of earnings for firms required to conform taxable income to 1 Desai (2003Desai ( , 2005Desai ( , 2006, Yin (2001), and Whitaker (2005) all suggest moving the taxable income calculation closer to the book income calculation, that is, conforming or basing tax more on the book rules, which is the setting we study. 2 Exceptions are McClelland and Mills (2007) and Hanlon and Maydew (2009), who examine tax revenue implications of increased book-tax conformity.…”

Section: Introductionmentioning

confidence: 76%

“…Such calls have led to proposals for greater conformity by both President Bush and President Obama under their respective frameworks for corporate tax reform (Hanlon et al 2008, Treasury 2012). …”

Section: Introductionmentioning

confidence: 99%

“…We explore the natural experiment created by the enactment of the Tax Reform Act of 1986 (hereafter, TRA 86 or the Act) and build on and extend the results in Guenther et al (1997) and Hanlon et al (2008) who also exploited this setting. We examine a small sample of unique firms that were required by the TRA 86 to change their computation of taxable income from cash to accrual basis (hereafter, converting firms), therefore increasing their book-tax conformity.…”

Section: Introductionmentioning

confidence: 99%

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Book-Tax Conformity and Capital Structure

2014

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We examine the effect of increased book-tax conformity on corporate capital structure. Prior studies document a decrease in the informativeness of accounting earnings for equity markets resulting from higher book-tax conformity. We argue that the decrease in earnings informativeness impacts equity holders more than debt holders because of the differences in payoff structures between debt and equity investments such that increases in book-tax conformity lead to increases in firms' reliance on debt capital. We exploit a natural experiment in the U.S. and find that firms facing an increase in required book-tax conformity increase leverage relative to other firms. We also provide evidence of an increase in the cost of equity (but not of debt) capital for firms facing an increase in required book-tax conformity relative to control firms and that these increases in cost of equity capital are positively associated with an increase in leverage. Our findings are consistent with firms substituting away from equity and towards more debt in the presence of higher book-tax conformity.

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Section: Introductionmentioning

confidence: 76%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Book-Tax Conformity and Capital Structure

2014

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“…Recently, many studies have been discussing this question by analyzing the effects of the so-called one-book-system. Part of these studies examine the effects of book-tax conformity on the information quality and earnings management (Blaylock, Gaertner, & Shevlin, 2015;Hanlon & Heitzman, 2010;Hanlon, Laplante, & Shevlin, 2005;Hanlon, Maydew, & Shevlin, 2008;McClelland & Mills, 2007). Others put forward the argument that a one-book system reduces the taxpayers' willingness to avoid explicit taxes (Atwood, Drake, Myers, & Myers, 2012;Desai 2003;Tang, 2015;Whitaker, 2005).…”

Section: Introductionmentioning

confidence: 99%

“…Previous studies either take a neoclassical view (Hundsdoerfer et al 2008;Schanz & Schanz, 2010;Wagner, 2000Wagner, , 2014 that excludes genuine uncertainty or they do not refer explicitly to any economic theory (Weber-Grellet, 1994;Wehrheim & Fross, 2010). The empirical studies also do not refer to a theoretical framework under genuine uncertainty Blaylock et al, 2015;Desai, 2003;Hanlon & Heitzman, 2010;Hanlon et al, , 2008McClelland & Mills, 2007;Tang, 2015;Whitaker, 2005). Although Schneider considers genuine uncertainty in taxation goals, he does not discuss a tax effects theory under genuine uncertainty (Schneider, 1997).…”

Section: Introductionmentioning

confidence: 99%

Is a One-book-system Adequate? A Framework for Tax Law Analysis Under Genuine Uncertainty

Schmiel

Weitz

2017

Accounting, Economics, and Law: A Convivium

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Abstract:This paper examines whether a one-book-system that takes the commercial law profit definition as tax base (the so-called authoritative principle) is adequate from an evolutionary point of view. We consider firstly the case that European International Financial Reporting Standards (EU-IFRS) are relevant for all statements with the authoritative principle based on EU-IFRS. Secondly, we examine the fact that EU-IFRS focus on the consolidated annual accounts and that the national accounting principles are relevant for individual statements. Tax law analysis under genuine uncertainty requires a framework and we present such a framework. It entails an interpretation of equality of taxation, a hypothesis on the functioning of markets, an interpretation of realizable and desirable market goals, tax effects hypotheses, and action hypotheses for personal and corporate companies under genuine uncertainty. Contrary to the mainstream of accounting literature, from our evolutionary point of view, the authoritative principle is adequate. The reason is that commercial profit is an adequate instrument to achieving the tax goal equality of taxation in the sense of reducing expectable tax avoidance decisions. This is the case because according to evolutionary action hypotheses as well as tax effects hypotheses, commercial profit can be a subjectively rational decision criterion for personal and corporate companies alike. Equality of taxation is for its part in line with the evolutionarily interpreted social values freedom of choice and equality before the law. Since we focus on the question if the existing commercial profit concept can be an adequate tax base, we do not discuss whether we would have more reasons to take a conservative profit concept as tax base rather than EU-IFRS. Just as little, we analyze whether it is better to take EU-IFRS profit as tax base although national accounting principles are relevant for individual statements.Keywords: ability to pay-principle, authoritative principle, equality of taxation, evolutionary tax effects hypotheses, evolutionary analysis of tax law, horizontal equity, vertical equity JEL classification: B53, K34, M48

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Earnings quality of multinational corporations: Evidence from Latin America before and after IFRS implementation

Melgarejo

2024

J Corp Accounting Finance

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This study evaluates whether Latin American multinational corporations (MNCs) report higher quality of accounting reports than companies with only operations in their home countries. In addition, it explores whether the impact of internationalization on the quality of accounting information has changed since the implementation of the International Financial Reporting Standards (IFRS) in the region. An emerging area of research studies the effect of firms’ internationalization on accounting and finance. Nevertheless, evidence of the impact of internationalization on the quality of earnings quality is scarce. Based on a sample of public organizations listed on the main stock exchanges of Brazil, Mexico, Peru, and Chile from 2000 to 2020, this study finds that companies with international operations present higher‐quality accounting reports than firms with only local operations. The impact of IFRS implementation on the quality of financial reports is significant only for companies with operations in their home countries. Latin American MNCs show a decline in the quality of accounting reports after adopting IFRS.

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An unintended consequence of book-tax conformity: A loss of earnings informativeness

Cited by 181 publications

References 34 publications

Book-Tax Conformity and Capital Structure

Book-Tax Conformity and Capital Structure

Is a One-book-system Adequate? A Framework for Tax Law Analysis Under Genuine Uncertainty

Earnings quality of multinational corporations: Evidence from Latin America before and after IFRS implementation

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