The effect of conservative financial reporting and tax aggressiveness on the market valuation of unrecognized tax benefits

Jiménez-Angueira, Carlos E.; Nwaeze, Emeka T.; Park, Sung-Jin

doi:10.1108/ara-07-2020-0111

Cited by 4 publications

(1 citation statement)

References 47 publications

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“…Heltzer (2009) shows that both tax and book income are conservative. Jiménez-Angueira et al (2021) evidence that tax planning associated with unrecognized tax benefits (UTBs) increases the firm value when related to higher accounting conservatism. Furthermore, Bornemann (2018) documents that future tax cuts drive accounting conservatism, and this is more pronounced in countries with higher book-tax conformity (i.e., there is an association between book and tax income).…”

Section: Accounting Conservatism and Tax Aggressivenessmentioning

confidence: 99%

Tax aggressiveness as a determining factor of conditional conservatism in Brazil,

Martinez

Júnior

Sena

2022

Rev. contab. finanç.

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This paper investigates whether the degree of tax aggressiveness is associated with conditional conservatism in Brazil. After a thorough literature review on accounting conservatism by Brazilian academia and a discussion about tax aggressiveness and accounting conservatism, a literature gap was found because the relationship between a firm's degree of tax aggressiveness and its conditional conservatism had not been investigated previously. Taxable income has a relationship with accounting income in the Brazilian corporate income tax system. Hence, tax planning can affect financial information properties. This study offers a partial explanation of accounting conservatism based on tax issues that contribute to the conservatism and taxation literature. The results suggest that tax strategies that aim to avoid tax burden are related to conditional conservative accounting. Hence, the practice of conditional conservatism in Brazil appears to be linked with tax-deductible alternatives of reducing earnings, which would explain tax planning’s association with the degree of conditional conservatism in financial reporting. This finding is relevant to financial reporting users that can consider our results in their analysis and to management that seeks to understand their decisions about tax planning better. For this research purpose, two Basu models (Basu, 1997) were adopted, adapted with tax-aggressiveness controls. The effective tax rate (ETR) was used as a tax-aggressiveness metric, controlling firms with both high and low ETR. The study period was from 2010 to 2019 for Brazilian firms from B3 S.A. - Brasil, Bolsa, Balcão (B3). The findings demonstrate a significant relationship between tax avoidance and conditional conservatism, that is, more tax-aggressive firms tend to use more conservative accounting.

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Section: Accounting Conservatism and Tax Aggressivenessmentioning

confidence: 99%

Tax aggressiveness as a determining factor of conditional conservatism in Brazil,

Martinez

Júnior

Sena

2022

Rev. contab. finanç.

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Justice, power and voluntary tax compliance: a moderation analysis among taxpayers in Addis Ababa, Ethiopia

Gobena

2023

ARA

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PurposeThe aim of this study was to examine the moderating roles of the legitimate power and distributive justice of the tax authority on the effect of procedural justice on the voluntary tax compliance of taxpayers in Addis Ababa, the capital of Ethiopia, by using survey data collected from taxpayers in the city.Design/methodology/approachData for the study were collected from 800 sample taxpayers who were drawn by using a systematic sampling technique. The variables of the study were constructed as indices from composing the scale items developed and tested for their validity by prior researchers. Having collected the data by using a 7-point Likert scale questionnaire and forming the latent variables, hierarchical multiple regressions were applied to determine the moderating effects of the two variables (i.e. legitimate power and distributive justice) on the effect of procedural justice on voluntary tax compliance.FindingsThe author found that both the legitimate power of the tax authority and distributive justice of the authority moderate the effect of procedural justice on voluntary tax compliance. The moderating roles of the two variables appear to be opposite in that low (but not high) distributive justice and high (but not low) legitimate power of the tax authority stimulate the effect of procedural justice on voluntary tax compliance.Research limitations/implicationsThe first limitation is that the data used in this study are self-reported data while the subject of the study is sensitive subject about which respondents are not believed to provide genuine responses. This is presumably because taxpayers are less likely to confess their tax evasion as they fear legal actions following their self-report. Hence, other controlled methods such as the experimental design are recommended to replicate the results of this study. The second limitation is that data for the study were gathered through a one-time cross-sectional survey and hence it would not warrant a causal claim between the study variables. Consequently, other research with a longitudinal or experimental design might warrant a causal relationship between the variables.Practical implicationsTherefore, the tax authorities must endeavor to attain high legitimacy by doing “the right things” as perceived by the taxpayers so that their tax-related decisions gain acceptance from the decision recipients. Tax policy makers as well ought to consider the importance of and the relationship between procedural justice, distributive justice and legitimate power of the tax authority in order to attain the maximum possible voluntary compliance of taxpayers that significantly reduces the administrative cost of taxes.Social implicationsThe study benefits society by enhancing tax compliance and hence helping the government secure a better amount of tax revenue and provide better public goods and services.Originality/valueThe findings of this study are of high theoretical and policy significance. Theoretically, the findings contribute to the integrative literature on economic deterrence and social-psychological factors that are responsible for voluntary tax compliance decisions. The parallel moderating roles of the two variables on the relationship between procedural justice and voluntary cooperation in a single model and in the tax compliance context are novel. In terms of applicability to policy formulations, they shed light on the need for a shift from a pure focus on aggressive tax audits and penalties, especially in emerging economies to a combination of the tax audits and the nurturing of the voluntary deference of taxpayers to the tax authority's decisions. Caution must, however, be taken that the results of this study may not be applicable to tax environments in other countries.

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Tax planning and earnings management: their impact on earnings persistence

Chen,

Niu,

Zeng

2024

JAAR

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PurposeThis study investigates the impact of tax planning, both independently and in conjunction with earnings management, on the persistence of earnings and its various components.Design/methodology/approachIn this study, tax planning refers to corporate strategies aimed at minimizing taxes, while earnings management involves manipulating reported earnings through accounting accruals. The analysis uses a dataset of US companies from 1989 to 2016 and includes a series of regression tests.FindingsThe study finds that firms implementing aggressive tax strategies exhibit lower persistence in cash flows from operations and earnings. Furthermore, companies using both aggressive tax planning and earnings management techniques show the lowest persistence in total accruals, cash flows from operations and reported earnings.Research limitations/implicationsOur sample of US firms limits generalizability. Future research could explore the international impacts of tax planning and earnings management on earnings quality and include post-2016 data for insights on the 2018 tax cuts and COVID-19. Investigating other earnings quality measures and their influence on investors and analysts could enhance performance assessment.Practical implicationsThis research identifies key factors influencing the interpretation of financial statements, offering valuable insights for regulators, auditors, tax authorities, financial analysts and other users with significant practical and social implications.Originality/valueThis study contributes to prior research by highlighting the need to investigate the real effects of tax avoidance and extends prior research by examining the impact of high levels of tax planning, along with aggressive earnings management, on earnings persistence.

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The effect of conservative financial reporting and tax aggressiveness on the market valuation of unrecognized tax benefits

Cited by 4 publications

References 47 publications

Tax aggressiveness as a determining factor of conditional conservatism in Brazil,

Tax aggressiveness as a determining factor of conditional conservatism in Brazil,

Justice, power and voluntary tax compliance: a moderation analysis among taxpayers in Addis Ababa, Ethiopia

Tax planning and earnings management: their impact on earnings persistence

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