Please use this identifier to cite or link to this item: http://hdl.handle.net/10125/51940

Do Smoothing Activities Indicate Higher or Lower Financial Reporting Quality? Evidence from Effective Tax Rates

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Title:Do Smoothing Activities Indicate Higher or Lower Financial Reporting Quality? Evidence from Effective Tax Rates
Authors:Demere, Paul
Li, Laura
Lisowsky, Petro
Snyder, R. William
Keywords:financial reporting quality
smoothing
managerial discretion
effective tax rates
Date Issued:29 Aug 2017
Abstract:Prior literature is mixed as to whether smoothing through accruals indicates higher or lower financial reporting quality (Tucker and Zarowin 2006; Jayaraman 2008; Dechow et al. 2010). Motivated by the unique inter-temporal features and reporting incentives of tax expense, we provide new evidence on this debate by examining the link between smoothing of GAAP effective tax rates (ETRs) and the likelihood of financial restatements. Different from earnings smoothing’s insignificant relation with restatements, we find that ETR smoothing through tax accruals is associated with a lower likelihood of financial restatement and lower likelihood of tax-related financial reporting fraud. Further investigation reveals that such negative associations are stronger in firms with a higher level of discretion in tax reporting and when the demand and monitoring for transparent reporting is higher. We also document corroborating evidence that smoothing through tax accruals increases the informativeness of GAAP ETRs for predicting future cash ETRs. Collectively, our results contribute to the financial reporting and tax literatures by providing evidence that smoothing activities pertaining to tax accruals are consistent with higher financial reporting quality.
URI/DOI:http://hdl.handle.net/10125/51940
Appears in Collections: 11 Financial: Financial Reporting Quality / Credit Ratings / Earnings Smoothing / Earnings Comparability (FAR3)


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