Conditional Conservatism And Tax Avoidance

Accounting conservatism,the practice of timely recognizing expenses and liabilities while gradually recognizing revenues and assets,is a commonly discussed topic in academic research,and is also a common accounting practice in the real business world,dating back some 500 years(Basu,1997).Accounting conservatism has been a debated topic and the standard setters have been undecided about whether the accounting information quality should uphold neutrality or conservatism.This thesis examines the relationship between conditional conservatism and tax avoidance;the sample includes listed U.S.companies during the period of 2009-2016.This thesis computes tax avoidance based on cash effective tax rates(CETR)and employs the C-score method developed by Khan and Watts(2009)and the skewness method from Givloly and Hayn(2000)to measure conditional conservatism.The main findings of this thesis imply that firms can use conditional conservatism as a vehicle to reduce actual tax burdens.The findings provide an indication that the tax reducing effects of conditional conservatism would be less pronounced when firms have tax losses carried forward.In general,this thesis provides insight by investigating the relationship between conditional conservatism and tax avoidance from an ex-post perspective and by examining how some company features such as having tax losses carried forward affect this relation.This thesis is complementary to the existing taxation explanation theory of accounting conservatism.The remainder of the thesis is oranized as follows.The first chapter introduces the basics and background about conditional conservatism and briefly discuss the contribution and implication of the dissertation.The second chapter reviews relevant studies involving previous research conducted on conservatism and tax avoidance.providing theoretical backbone for the thesis.Chapter 3 illustrates the motivation and develops pertinent hypotheses,while Chapter 4 discusses the research method.Chapter 5 provides an overview of the protocols regarding the data selection and preparation.and Chapter 6 discusses the main empirical results.Also in Chapter 6 is an analysis of endogeneity,to enhance the robustness of the research.Chapter 7 concludes the thesis,by summarizing the research,proposing policy recommendations,highlighting limitations and suggestions for future research opportunities.Although the research is based on U.S.listed companies,it is still insightful because the U.S.experience as a highly developed country would provide important indications for the future reformation of Chinese finance and tax system.