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Book Tax Differences and Firm Opacity

Yunhao Chen, Florida International University
Xiaochuan Huang, University of Arkansa
Raynolde Pereira, University of Missouri-Columbia
Changjiang Wang, Florida International University

ABSTRACT: Do high book-tax differences imply greater firm opacity? This paper sheds empirical light on this question. Recent research offers two views on this relation. One view is that book-tax difference reflects earnings management which in turn affects firms’ information opacity. An alternative view is that high book-tax differences result from an aggressive tax avoidance policy also adversely affect firm information environment. While both views suggest that book-tax differences will be positively associated with firm opacity, the underlying causal channels differ. In this paper, we first examine the impact of book-tax difference on firm opacity. We find supportive evidence of a positive relation between book-tax difference and firm opacity. Second, we examine the effects of tax sheltering and earnings management components of book tax difference on firm opacity. We find both aggressive tax and aggressive financial reporting behavior contributes to firm opacity.

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