Relationship between earnings management and abnormal book-tax differences in Brazil

Abstract

The aim of this study was to verify whether the discretionary actions of managers to manage earnings can be captured by abnormal book-tax differences (ABTD). In Brazil, there are no studies with the disaggregated use of earnings management (EM) through operational choices as a proxy for discretionary decisions to be captured by ABTD. Moreover, the previous studies focus on the period before the International Financial Reporting Standards (IFRS) were required in Brazil or when they were still being implemented, which may change the context of earnings management in the country and, consequently, the relationship with ABTD. This study is relevant for accounting information users, such as investors, creditors, the tax authorities, and regulatory bodies, as the findings may help them to identify manager opportunism through earnings management. The identification that tax management can be affected by EM through accounting and operational decisions reveals that investors, creditors, the tax authorities, regulators, and auditors should remain vigilant against deteriorations in accounting information quality and, consequently, in the utility of that information. An analysis of 201 non-financial companies was carried out, covering 2012 to 2016, thus totaling 1,005 observations. Five panel data regression models were used: three to capture EM, one to identify ABTD, and one to relate these variables. A significant and positive relationship was revealed between accounting and operational EM and ABTD, indicating that companies that manage earnings upward have positive ABTD, and companies that manage earnings downward have negative ABTD. This research therefore contributes to identifying that ABTD captures the discretionary actions of managers related to EM through accounting and operational decisions.