Abstract
This paper analyzes a tax compliance game to examine how the degree of conformity in tax systems affects the value relevance of accounting information. The parallel settings in the book-tax conformity case and the decoupling case, and their solutions are compared to obtain comparative results. In the conformity case, the firm must report its earnings that are equal to its taxable income. On the other hand, the firm can report its accounting earnings and its taxable income differently. However, the tax authority conducts a tax audit based on the book-tax difference. The analysis shows that the value relevance in the conformity model is strictly higher than that in the decoupling model. Although this result is somewhat counterintuitive, it is consistent with some empirical studies.
Published Version
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