Book-tax conformity and earnings management: A research agenda

We conduct a literature review of 60 studies on the impact of book-tax conformity on earnings management. We review this relationship in public firms, and then in public versus private firms. We also review external factors that may affect this relationship, such as accounting standards changes/International Financial Reporting Standards (IFRS) adoption, tax law changes, tax enforcement, and external audits. Finally, we review the studies on book-tax conformity and earnings attributes. The results are inconclusive as to whether high book-tax conformity increases or decreases earnings management. We find that private firms manage earnings and taxes to a greater extent than public firms when book-tax conformity is strong and that IFRS adoption is not enough to reduce earnings management and increase tax compliance. Firms use negative discretionary accruals before tax rate reductions to achieve their tax planning goals. Finally, tax authority enforcement strengthens financial reporting quality and decreases tax avoidance, whereas stronger book-tax conformity reduces the information content and timeliness of accounting earnings. Based on our review, we provide suggestions for future research.