UC Irvine

Frank, Lynch, and Rego (2009) and Lennox, Lisowsky, and Pittman (2013) examine the relationship between aggressive book and tax reporting and report conflicting results. I identify differences in the methodology of these two studies that I predict account for their opposing conclusions. I find that the measure of aggressive book reporting is the most important determinate of the relationship documented, and I conclude that the relationship between aggressive book and tax reporting likely varies among firms.

I then show that the relationship between aggressive book and tax reporting is positive for some firms and negative for others. I review characteristics associated with aggressive book and tax reporting and use Principal Component Analysis to reduce these characteristics to their underlying components. I test for and find significant differences in the components of firms with different reporting strategies. Finally, I examine whether factor scores can be used to correctly identify a firm's reporting strategy, and find I can correctly identify the reporting strategy in up to 33% of firm-years. I conclude firms choose book and tax reporting strategies that result in both positive and negative relationships between aggressive book and tax reporting, and that firm characteristics can provide assistance in the identification of the firm's reporting strategy.