Tax Costs, Book-Tax Difference and Earnings Management: Empirical Evidence from Japan

Abstract

This paper investigates “book-tax conforming earnings management” that have current taxable income consequences and “book-tax nonconforming earnings management” that do not have current taxable income consequences by using Japanese individual financial data. To examine these earnings management activities and these relationships, I classify discretionary accruals in discretionary book tax accruals (DBTA) and discretionary book only accruals (DBOA) by connection with tax accounting rules. As results of investigation, I find the following things. (1)Firms use DBTA to minimize tax costs. On the other hand, (2)firms use DBTA and DBOA to beat benchmarks. Moreover, (3)in firms that are suspected to earnings upward, there is a negative correlation between DBTA and DBOA. Although the Japanese accounting system is closely linked to tax assessment, these results suggest that Japanese firms distinguish DBTA from DBOA, and that they use in combination DBTA and DBOA.