Book-Tax Conformity and Reporting Behavior A Quasi-Experiment

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Book-Tax Conformity and Reporting Behavior-A Quasi-experimentMaria Theresia Evers*, Ina Meier**, Katharina Nicolay*** January 2016Abstract: We examine how a comprehensive change in book-tax conformity affects firms' reporting behavior. To this end, we exploit a Reform Act as a quasi-natural experiment which implied a decrease in book-tax conformity in Germany in 2010. In particular, this reform allows firms to exercise tax accounting options independently from financial accounting. Our study builds on a unique dataset of linked individual financial statements and actual tax return data. It covers roughly 150 incorporated firms for the years 2008 to 2012. Exploiting the exceptional change in conformity, we contribute to the ongoing debate on the impact of booktax conformity. Our results show that profitable companies, which have a clear tax sheltering incentive, actually use the newly introduced reporting leeway to manage taxable income downwards. This is especially attributable to companies exploiting favorable tax depreciation rules. Moreover, we find larger opportunistic tax reporting responses for small companies with less complex and predominantly domestic group structures. In addition, we observe that a decrease in book-tax conformity induces a decrease in the general persistence of taxable income, but at the same time gives rise to higher financial earnings persistence. This corroborates our finding of increased tax sheltering activity in post reform years.JEL Classification: H20, H25, K34, M41

Intertemporal Income Shifting Around a Large Tax Cut: the Case of Depreciations

“…A further implication of that finding is that worries about negative consequences of the very high book-tax conformity in Germany in 2007 4 on the informativeness of German GAAP (e.g., Evers et al 2016) might be not that relevant for average depreciations and write-offs. Even if we might underestimate the true impact of BTR 2008 on depreciation volumes, it seems unlikely that the very high tax cut of BTR 2008 excessively affected average depreciation volume in the financial accounts.…”