Taxation and income smoothing: Evidence from accruals

This study examines the effects of taxation on managers' income smoothing activities. Risk-averse managers are motivated to reduce the variability of accounting earnings when their compensation heavily depends on such earnings. Taxation enters into managers' income smoothing decisions in two ways. First, the tax provision included in the financial statements affects the variability of after-tax accounting earnings (the earnings effect). Regardless of the tax rate structure, after-tax earnings variability decreases as book effective tax rates increase. Therefore, managers were predicted to smooth less as book effective tax rates increased. This relation was predicted to be stronger when bonus compensation was tied to after-tax earnings. Second, the net present value of taxes paid may change due to income smoothing activities (the cash flow effect). Managers were predicted to smooth less as the marginal change in the net present value of taxes paid increased.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Accountancy

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2011

Author dc:creator

• Atwood, Tammy Jean

Contributors dc:contributor

• Dietrich, J. Richard

• Business Administration, Accounting

Statement dc:rights

• Copyright 1995 Atwood, Tammy Jean

Language dc:language

eng

Identifier

AAI9624278
(UMI)AAI9624278

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/19787