The Book-tax Differences And Earnings Quality

In order to meet the demand of China’s economic development, China’s corporate income tax and accounting have undergone two stages: unity and separation. At present, China is under the separation stage. Under this detached model, the differences exist in accounting and tax objectively. It also provides opportunities to earnings management and tax avoidance. Earnings management affects both earnings quality and differences of accounting and tax law, But what is correlation between book-tax differences and earnings quality? How to determine earnings quality through book-tax differences’ information?Firstly, the paper studies the influencing factors of book-tax differences through theoretical analysis and empirical research. And the research shows institutional factors, earnings management and tax avoidance are mainly reasons of book-tax differences. Book-tax differences and earnings quality management have positive correlation. There is significant positive correlation between book-tax differences and non-operating income and loss, and we can use non-operating income and loss as substitution variables for system factors. Secondly, the paper draws a conclusion that book-tax differences and earnings quality management have significant negative correlation, which means the higher the book-tax differences are, the lower the earnings quality will be. Finally, the paper studies information content of book-tax differences, which finds out book-tax differences can become the judging indexes of earnings quality management.This paper has three innovations:(1) it uses non-operating income and loss as substitution variables for system factors, which enriches the perspective of institutional factors.(2) It finds out that book-tax differences can be used for judging indexes of earnings quality, which enriches the research content between book-tax differences and earnings quality.(3) It builds discriminant function and discriminant rules according to discriminant analysis method, which provides new methods and ideas for earnings quality study.