Can book-tax differences capture earnings management and tax management? Empirical evidence from China
The International Journal of Accounting
Book-tax differences, China, Earnings management, Tax management
This study investigates the relationship between book-tax differences (BTDs) and earnings management, tax management, and their interactions in Chinese-listed companies. Using unique tax-effect BTDs obtained from Chinese B-share-listed firms, we find that firms with strong incentives for earnings and tax management exhibit high levels of abnormal BTDs. This suggests that BTDs can be used to capture both accounting and tax manipulations induced by managerial motivations. Our results indicate that earnings management explains 7.4% of abnormal BTDs, tax management accounts for 27.8% of abnormal BTDs, and their interaction explains 3.2% of abnormal BTDs. Tax-effect BTDs are more powerful than income-effect BTDs in capturing opportunistic reporting at both conceptual and empirical levels.
Copyright © 2011 University of Illinois
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Tang, T., & Firth, M. (2011). Can book-tax differences capture earnings management and tax management? Empirical evidence from China. International Journal of Accounting, 46(2), 175-204. doi: 10.1016/j.intacc.2011.04.005