Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work.

/pdf/understanding-earnings-quality-a-review-of-the-proxies-their-1r9rjtuq8l.pdf

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

https://repository.upenn.edu/cgi/viewcontent.cgi?article=1004&context=accounting_papers

This study exploits the implementation of IRS Schedule UTP to examine how linking tax return disclosures to financial reporting for income taxes affects firms' reporting decisions. Using ...

Unintended Consequences of Linking Tax Return Disclosures to Financial Reporting for Income Taxes: Evidence from Schedule UTP

Under agency theory and assumptions of earnings management, the objective is to study the relationship between earnings management (EM) and the cost of debt (Ki) of Brazilian publicly held companies in the period from 1996 to 2007. The assumptions raised through the literature are that targeting better contractual terms, like cost of debt, current or past cost, motivates the company to manage the current result so as to obtain better conditions for current or future cost. Thus, companies, intentionally, would seek to manage their results, motivated by the cost of debt. However, theoretical support for the relationship between these variables would be unidirectional, with EM influencing the cost of debt, supporting the second hypothesis. To reach the objective, the work used the EM model for the discretionary accruals proposed by Kang and Sivaramakrishnan (1995) as a proxy. The tests were based on Mann-Whitney's, nonparametric U test, followed by the Hausman specification test for simultaneity analysis, ending with regression with panel data arranged with Newey-West correction. Tests showed the average for a positive relationship between EM and Ki, but the test did not indicate that there is a simultaneous inter-relationship between variables. The results of the panel regression indicates that Ki does not influence EM, but there is a positive relationship between them, in which the higher the EM, the higher the Ki.

/pdf/gerenciamento-de-resultados-e-a-relacao-com-o-custo-da-w209lq2h4g.pdf

Gerenciamento de resultados e a relação com o custo da dívida das empresas brasileiras abertas

This study examines the tax reporting consequences of financial reporting discretion. Using a matched sample of financial statements with tax returns, I provide estimates of the accuracy of tax return information inferred from financial statements. To examine the tradeoffs between financial and tax reporting, I model the relation discretionary financial accounting accruals have to discretionary federal tax accruals. The methodology takes advantage of the contemporaneous nature of reporting to mitigate econometric problems identified in previous research. I find the extent tax reporting reflects discretionary financial reporting varies dramatically by industry, profitability, and the sign of discretionary accruals. I also find managers are able to undertake tax reducing activities with less of an effect on financial reporting than tax increasing accruals, consistent with recent evidence on the differential growth of book and tax income, and with tax avoidance activities.

/pdf/estimates-of-the-magnitude-of-financial-and-tax-reporting-4glrxsrdjv.pdf

Michael J. Calegari

Papers

The effect of tax accounting rules on capital structure and discretionary accruals