Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269

Contents lists available at SciVerse ScienceDirect

Advances in Accounting, incorporating Advances in

International Accounting
journal homepage: www.elsevier.com/locate/adiac

Empirical evidence on the impact of external monitoring on book–tax differences☆

Jared A. Moore
College of Business, Oregon State University, 200 Bexell Hall, Corvallis, OR 97331‐2603, United States

a r t i c l e i n f o a b s t r a c t

Keywords: This study investigates whether institutional ownership levels are associated with levels of and time-series
Book–tax differences variability in book–tax differences (BTDs). Firm and year fixed-effects regression results suggest that
Permanent book–tax differences institutional ownership is negatively associated with total, permanent, and temporary BTDs. This effect is
Temporary book–tax differences driven primarily by permanent BTDs in the pre-SOX era but is consistently present for both permanent
Volatility in book–tax differences and temporary BTDs post-SOX. Further, this negative association is present regardless of firms' classification
Corporate governance
as “tax planners” and/or “earnings managers.” Finally, the results provide some evidence that stronger
Institutional ownership
monitoring by the board and audit committee (i.e., a smaller and more independent board and a larger
audit committee) is associated with lower permanent BTDs but is not consistently related with total or
temporary BTDs. Overall, these findings are consistent with higher levels of institutional ownership equating
to more effective monitoring of management, resulting in lower BTDs (in terms of both levels and time-series
variability).
© 2012 Elsevier Ltd. All rights reserved.

1. Introduction stream of research has recently emerged reporting evidence of

Institutional ownership has become more prominent as a corporate
governance mechanism over the last few decades as evidenced by the
rise in the percentage of publicly traded equity owned by institutions
from 10% in 1970 to over 60% in 2006 (Aghion, Van Reenen, &
Zingales, 2010). Theoretically, institutional owners have relatively
strong incentive and ability to actively and effectively monitor
managers, thus improving overall corporate governance (e.g., Gillan &
Starks, 2003; Schleifer & Vishny, 1997). Some empirical research links
higher levels of institutional ownership directly with a reduced
tendency of managers to make myopic investment decisions (Bushee,
1998), higher levels of innovation (Aghion et al., 2010), and firm value
(Clay, 2002). Other studies (e.g., Cornett, Marcus, & Tehranian, 2008;
Chung, Firth, & Kim, 2002) find results consistent with institutional
investors monitoring in the financial reporting arena as well,
documenting a negative association between institutional ownership
level and earnings management. This study examines whether external
monitoring by institutional owners influences book–tax differences, a
broader reporting context with potential implications for the
information environment and/or capital markets.
Differences between reported financial statement income and
taxable income, or book–tax differences (BTDs), can arise simply
from mechanical differences in accounting rules for book and tax
purposes, but they also often result from managerial judgment. A
potential positive and negative information and/or economic effects
of BTDs, particularly in the context of BTDs reflecting managerial
judgment. Hanlon, Laplante, and Shevlin (2005) and Lev and Nissim
(2004), for example, document that taxable income (and therefore
BTDs) provides incremental information to investors over and above
that contained in financial statements. Atwood, Drake, and Myers
(2010) provide evidence of higher-quality earnings on average in
countries with lower levels of required book–tax conformity. Some
studies also show BTDs (in the context of aggressive tax reporting)
to be positively related to firm value in certain situations (Desai &
Dharmapala, 2009; Wilson, 2009). 1
However, other extant research suggests that the potential
information effects of BTDs include a negative impact on the informa-
tiveness of financial reports (Hanlon, 2005). Prior studies also find that
market participants, including analysts, do not fully incorporate BTDs
into share prices and forecasts (Weber, 2009; Hanlon, 2005; Lev &
Nissim, 2004) and that BTDs contribute to divergence of opinion in the
market (Comprix, Graham, & Moore, 2011). Other recent research
links levels of and variation in BTDs with certain negative economic
outcomes (lower bond ratings, higher cost of equity capital, and higher
audit fees), attributing these findings to BTDs having a negative effect
on the quality and precision of the information reported in the financial
statements (Hanlon, Krishnan, & Mills, 2012; Ayers, Laplante, &
McGuire, 2010; Dhaliwal, Huber, Lee, & Pincus, 2008).

☆ I thank Roger Graham and Donald Neubaum, Philip Reckers (editor), and two
1
anonymous reviewers for helpful comments and suggestions. I also gratefully A number of recent studies find that total and/or permanent BTDs reflect
acknowledge financial support from the Mary Ellen Phillips professorship. aggressive tax reporting (e.g., Frank, Lynch, & Rego, 2009; Wilson, 2009; Desai &
E-mail address: jared.moore@bus.oregonstate.edu. Dharmapala, 2006).

0882-6110/$ – see front matter © 2012 Elsevier Ltd. All rights reserved.
doi:10.1016/j.adiac.2012.06.002
 J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269
To the extent that BTDs contribute to information and/or economic
outcomes that either support or run counter to the interests of
shareholders, it seems likely that effective corporate governance will
influence BTDs to some extent. As the bulk of the extant U.S.-based
evidence links BTDs with uncertainty-related information and economic
costs (e.g., Hanlon et al., 2012; Comprix et al., 2011; Ayers et al., 2010;
Dhaliwal et al., 2008), I predict a negative relation between BTDs and
institutional ownership levels. Using a firm fixed-effects regression
model and an unbalanced panel of 7070 firm-year observations
covering the period 1998–2009, and measuring BTDs both in terms of
levels and time-series volatility, I find institutional ownership to be
negatively associated with total, permanent, and temporary BTDs.
Further, results suggest that this effect is stronger and more uniform
for permanent differences than for temporary ones, consistent with
permanent BTDs generally conveying more uncertainty than do
temporary BTDs (Comprix et al., 2011).
In supplemental tests, I also examine the role of independence level
and size of the board of directors and the audit committee (i.e., internal
monitoring) in determining BTDs, and any extent to which my main
results are dependent on 1) whether firms avoid taxes or manage
earnings at a high level (e.g., Hanlon et al., 2012; Ayers et al., 2010)
and/or 2) the time frame examined (e.g., pre- vs. post-Sarbanes–Oxley
(SOX)). First, the results provide some evidence that stronger
monitoring by the board (i.e., greater independence and fewer
members) and audit committee (i.e., more members) leads to lower
permanent BTDs but does not appear to consistently impact total or
temporary BTDs.
Second, the results relating to firms' status as tax planners and/or
earnings managers suggest that my main inferences (discussed
earlier) are substantially unchanged regardless of whether firms
engage in high levels of tax planning or earnings management,
although tax planning does appear to have some attenuating
interactive effect with respect to permanent BTD levels. Concerning
the time frame examined, results indicate that my main inferences
(discussed earlier) generally hold across the entire sample period.
However, the main results for temporary BTDs, which are not as
strong overall as those for permanent BTDs, appear to be driven by
the post-SOX portion of the sample period, where the relation
between institutional ownership and temporary BTDs is consistently
significantly negative. To the extent that temporary BTDs are more
reflective of aggressive financial reporting than are permanent BTDs
(e.g., Badertscher, Phillips, Pincus, & Rego, 2009; Frank & Rego, 2006;
Hanlon, 2005; Phillips, Pincus, Rego, & Wan, 2004; Phillips, Pincus, &
Rego, 2003), this finding is consistent with the heightened focus on
corporate governance post-SOX centering around a reduced tolerance
for uncertainty in financial reporting. Finally, I find no evidence that FIN
48 impacted the association between institutional ownership and BTDs.
Overall, the findings in this paper are consistent with higher levels
of institutional ownership equating to more effective monitoring of
management, resulting in lower BTDs (in terms of both levels and
time-series variability). This effect is driven primarily by the permanent
component of BTDs in the pre-SOX era but is consistently present for
both permanent and temporary BTDs post-SOX. Further, the negative
association between institutional ownership and BTDs is present
regardless of whether firms are classified as “tax planners” and/or
“earnings managers.” This study contributes to the growing literature
on BTDs and to the literature on impact of corporate governance
mechanisms on reporting practices by providing evidence consistent
with monitoring effectiveness reducing BTDs, thereby reducing (to
some extent) their apparent uncertainly-related negative consequences.
The remainder of this paper is organized as follows: Section 2
provides a review of the prior literature and the development of my
hypotheses. Section 3 discusses the methodology and data used for
my primary tests of the association between institutional ownership
and book–tax differences. Section 4 presents the results of my analyses,
and Section 5 presents my concluding remarks.
255
2. Prior literature and hypothesis development
2.1. Institutional owners as monitors
Schleifer and Vishny (1997) describe corporate governance as
dealing with “the ways in which suppliers of finance to corporations
assure themselves of getting a return on their investment.” As one
of the major focuses of corporate governance is controlling the agency
costs that arise from the separation of ownership and control, a number
of governance mechanisms exist for the purpose of protecting share-
holders from (among other things) poor decision making and/or
resource diversion by managers. Examples of governance mechanisms
that constrain the activities of managers include monitoring by the
board of directors and its committees, financing agreements, and
labor and compensation contracts (Minnick & Noga, 2010; Jiang, Lee,
& Anandarajan, 2008; Brown & Caylor, 2006; Gillan & Starks, 2003).
One dimension of corporate governance that has increased in
prominence over the last few decades is monitoring of management
by institutional investors, as institutional ownership of publicly traded
equity has risen from 10% in 1970 to over 60% in 2006 (Aghion et al.,
2010). Prior studies posit that institutional owners have relatively
strong incentive and ability to actively oversee executives' activities
and thus provide more effective monitoring and improve corporate
governance overall (e.g., Gillan & Starks, 2003; Schleifer & Vishny, 1997).
Empirical evidence supports this theory. For instance, Bushee
(1998) finds that firms are less likely to cut research and development
spending to reverse an earnings decline where institutional ownership
is high, indicating that monitoring by institutional investors reduces the
tendency of managers to make myopic investment decisions. Similarly,
Aghion et al. (2010) document a positive association between institu-
tional ownership and innovation (measured as number of future cite-
weighted patents), suggesting that external monitoring by institutions
has a positive impact on the productivity of research and development.
Agrawal and Mandelker (1992) provide evidence that the stock market
reaction to proposed antitakeover charter amendments (i.e., “shark
repellents”) is positively related to the level of institutional ownership,
implying that the market views such proposed amendments as less
likely to be harmful where monitoring by institutions is higher. Linking
institutional ownership directly with firm value, Clay (2002) finds a
positive association between level of investment by institutional share-
holders and Tobin's Q.
Some recent evidence suggests that the effects of monitoring on the
part of institutional investors extend to financial reporting. Nwaeze
(2011) finds in an earnings response coefficient (ERC) framework that
institutional owners are particularly sensitive to exposure to earnings
management incentives. Chung et al. (2002) and Cornett et al. (2008)
provide evidence that is consistent with Nwaeze (2011); both
document a negative association between institutional ownership and
earnings management. The aim of the current study is to examine
further the interaction between institutional ownership and reporting
in the context of book–tax differences, which have been shown to
impact the information environment in multiple ways (discussed later).
2.2. Book–tax differences
Book–tax differences (BTDs), defined as the excess of financial
statement income over federal taxable income or vice versa,
represent an intersection of two reporting contexts. 2 BTDs arise
from the fact that firms must report at least two separate measures
of income annually, one to investors and other interested parties via
the financial statements and one to the federal government (Internal
Revenue Service) via the tax return. While both income measures
reflect and summarize a firm's economic gains and losses, they are
2
For a similar but more in-depth discussion of BTDs and the related literature, see
Comprix et al. (2011).
256 J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269
derived pursuant to different sets of accounting standards that have
competing objectives and are, therefore, rarely the same. Generally
Accepted Accounting Principles (GAAP) provide the accounting
standards for financial statement reporting, and these standards apply
a concept of conservatism that aims to safeguard against overstatement
of income and/or assets. Conversely, the Internal Revenue Code (IRC)
provides guidance on the derivation of the firm's taxable income, the
basis for computing income tax liability, and the accounting standards
under this regime generally apply a concept of conservatism that
seeks to safeguard against understatement of income.
Book–tax differences can be either temporary or permanent.
Temporary differences result when GAAP and IRC treatments for
particular revenues or expenses differ only on the period in which
the revenue or expense item is recognized. A book–tax difference
appears in each of the affected periods, but the cumulative effect of
the item on income across all affected periods is the same under
both regimes. Depreciation is a common example of an expense
item that gives rise to temporary BTDs. Permanent differences result
when GAAP and IRC treatments for particular revenues or expenses
differ in ways beyond their timing. Nondeductible expenses such as
50% of meals and entertainment costs and nontaxable interest income
from municipal bonds are common examples of permanent BTDs.
While both permanent and temporary BTDs are often simply the
result of mechanical differences in accounting rules for book and tax
purposes, they can also reflect managerial judgment. A salient case
of such managerial judgment is aggressive reporting practices for
financial and/or tax purposes, which prior evidence suggests are
reflected in BTDs. On the financial reporting side, a number of studies
in the last decade link BTDs, particularly temporary ones, with earnings
management (e.g., Badertscher et al., 2009; Frank & Rego, 2006; Hanlon,
2005; Phillips et al., 2003, 2004). Notably, Badertscher et al. (2009)
document evidence consistent with total and temporary BTDs being
incrementally useful over discretionary accruals in predicting financial
statement restatement. 3 With respect to tax reporting, Mills (1998)
reports that BTDs are positively associated with Internal Revenue
Service proposed audit adjustments. Similarly, other recent evidence
links BTDs, particularly permanent ones, with corporate tax shelter
activity (e.g., Frank et al., 2009; Wilson, 2009; Desai, 2003).
However, although some of the managerial discretion contained
in BTDs relates to aggressive reporting practices, much of it also
relates to the proper application of GAAP and/or the IRC, estimation
of relevant revenues and costs, and/or assessment of the existence
and timing of future taxable events. For instance, GAAP requires the
recognition of deferred tax assets and/or liabilities and deferred tax
expense or benefit for the future tax consequences of current or
past transactions (i.e., temporary BTDs). To the extent that deferred
tax assets arise from this process, managers may choose to also
recognize a deferred tax asset valuation allowance to acknowledge
the uncertainty as to whether the future tax benefits underlying the
deferred tax asset will ever actually be realized completely (i.e., to
avoid overvaluing the asset). As for permanent differences, managerial
judgment is required in the determination of a number of tax positions
that are not reflected in the financial statements (e.g., allocation of
overhead for purposes of the domestic production activities deduction).
Further, to the extent that any such tax positions are uncertain in
that they may be disallowed by the IRS in the future, managers must
assess the probability of disallowance and record a liability on the
3
The studies discussed here focus on BTD magnitudes within a given set of reporting
rules (i.e., a given book-tax conformity regime), as does the current study. Some
studies focus instead on comparing book-tax conformity regimes across countries with
respect to aggressive financial reporting, finding seemingly different results. For
example, Blaylock, Gaertner, and Shevlin (2012) find that levels of earnings
management are higher on average in countries with more required book-tax
conformity. Although this result appears inconsistent with the U.S.-based evidence
discussed here, it is not clear that a cross-country comparison of regimes addresses
the same issue.
balance sheet under FIN 48 for those positions that have an estimated
probability of disallowance exceeding 50%. 4
2.3. Book–tax differences and the information environment
The notion that BTDs reflect managerial judgment and related
uncertainty has potential implications for the information environment.
On the one hand, prior evidence suggests that taxable income conveys
information to the market incremental to that provided in financial
statements (Hanlon et al., 2005; Lev & Nissim, 2004), implying that
BTDs may benefit financial statement users to some extent from an
information content standpoint. Hanlon, Maydew, and Shevlin (2008)
provide similar evidence by documenting reduced ERCs for firms forced
to conform their book and tax incomes following the Tax Reform Act of
1986. In an international setting, Atwood et al. (2010) find that earnings
are less persistent and more weakly correlated with future cash flows in
countries where required book–tax conformity is higher, further
indicating positive on-average effects of BTDs on the information environ-
ment (i.e., improved earnings quality). Some prior studies even show
total BTDs to be positively related to firm value, at least where corporate
governance is strong (Desai & Dharmapala, 2009; Wilson, 2009).5
However, other prior research suggests that BTDs (at least large
ones) have negative implications for the informativeness of financial
reports and therefore for capital markets. Hanlon (2005) reports a
negative association between large BTDs and earnings persistence,
suggesting that large BTDs reduce the informativeness of current
earnings. 6 Hanlon (2005) and Lev and Nissim (2004) find that the
market misprices BTDs, and Weber (2009) shows that analysts also do
not fully incorporate BTDs when making earnings forecasts. Comprix et
al. (2011) report that levels of and time-series variation in BTDs are
associated with differences of opinion among market participants,
specifically investors and analysts, suggesting that BTDs contribute to
uncertainty in the market.
One take-away from the mixed evidence discussed above is that
while there is information in BTDs that is useful for share pricing,
the information contains uncertainty such that market participants'
interpretations of it vary significantly. Some recent studies provide
evidence that the uncertainty contained in BTDs may impose real
costs on firms by linking characteristics of BTDs with certain negative
economic outcomes. Ayers et al. (2010) examine the impact of BTDs
on credit ratings and find that large positive or negative changes in
BTDs are associated with negative changes in credit ratings. However,
they also find that this effect does not hold for firms classified as “tax
planners.” Their findings imply that higher BTDs (at least volatility
therein) are generally associated with higher costs of debt, except
where the BTDs stem from tax planning.
Dhaliwal et al. (2008) examine the association between BTDs and
cost of equity capital. Measuring BTDs in terms of both levels and
time-series variability, they document a positive association between
BTDs and multiple proxies for cost of equity capital. While this effect is
present for both levels and time-series variability in BTDs, the authors
4
FIN 48 refers to Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. Managers assessed the probability of
disallowance for uncertain tax positions prior to the implementation of FIN 48 as well,
but the accounting rules and recognition criteria were less clear, and the most common
practice was to record a reserve (vs. a separate liability) to account for the uncertainty.
5
Both Desai and Dharmapala (2009) and Wilson (2009) use total BTDs as a proxy
for aggressive tax reporting, and their results are interpreted as tax aggressiveness
increasing shareholder value where governance is strong. Thus, any extent to which
BTDs reflect value-maximizing aggressive tax reporting also amounts to a positive
implication of BTDs for shareholders.
6
Hanlon (2005) and Lev and Nissim (2004) focus on firm-level BTD magnitudes,
whereas Atwood et al. (2010) and Hanlon et al. (2008) examine levels of required
book-tax conformity. Similar to the discussion in footnote 3 concerning Blaylock et
al. (2012), a potential explanation for these seemingly conflicting results is that a
comparison of book-tax conformity regimes may have different implications from
those of an analysis of firm-level BTD magnitudes within a given reporting regime.
 J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269 257

find volatility to be the main driver of their results, implying that BTDs As previously discussed, BTDs can be permanent or temporary.
(at least volatility therein) are also positively linked with costs of equity. BTDs of each type contain different information and carry different
Hanlon et al. (2012) investigate whether BTDs are related to audit types and levels of uncertainty as to their ultimate resolution. As
fees. Aside from being a monetary cost, audit fees proxy in their study Comprix et al. (2011) argue, on balance, the uncertainty contained
for auditor risk assessments and auditor effort. They find a positive in permanent BTDs is likely to be greater than that in temporary
link between BTDs and audit fees overall. They also show that that BTDs because the future reversal of a deferred tax asset/liability will
this association is stronger for firms that appear to have managed be more predictable in most cases than the possible disallowance of
earnings than for those that are tax avoiders. Consistent with Ayers a tax position that creates a permanent difference. Although they
et al. (2010), their results suggest that BTDs are associated with higher find significant associations between market uncertainty and both
auditor-assessed risk and auditor effort (and thus audit costs), but this permanent and temporary differences, they do find a more consistent
effect is weaker where the BTDs stem from tax planning. and stronger effect for permanent BTDs than for temporary BTDs. To
determine whether any effect found for total BTDs is driven primarily
2.4. Book–tax differences and institutional ownership by permanent or temporary BTDs, I examine each type separately. I
hypothesize a negative association between institutional ownership
The evidence discussed above implies both positive and negative and both permanent and temporary BTDs but expect the relation
effects of BTDs on the information environment, with potential with permanent differences to generally be the stronger of the two.
negative effects extending to increased debt-, equity-, and audit- These predictions are stated formally in the following hypotheses:
related costs. The studies that link BTDs to such costs attribute their
findings to larger BTDs (generally) having a negative effect on the H2a. Permanent book–tax differences are decreasing in the level of
quality and precision of the information reported in the financial institutional ownership, and
statements, consistent with Comprix et al. (2011). To the extent
H2b. Temporary book–tax differences are decreasing in the level of
that BTDs have positive and/or negative implications for share-
institutional ownership.
holders, one might expect corporate governance mechanisms to
influence them. BTDs are an interesting setting in which to examine
3. Methodology
the effects of governance on managerial reporting decisions partially
because they contain information about multiple managerial accounting
3.1. Measuring book–tax differences
decisions (e.g., proper application of GAAP and/or the IRC, aggressive
financial and/or tax reporting, etc.) and the uncertainty surrounding
I use both levels and time-series variability to measure BTDs. 8 Levels
those decisions. Accordingly, the overall extent to which BTDs represent
of BTDs are frequently used in the literature (e.g., Wilson, 2009;
benefits vs. costs to shareholders is not clear ex ante.
Badertscher et al., 2009; Desai & Dharmapala, 2006; Hanlon, 2005)
Some prior studies document the effects of various governance
but are potentially limited in that they represent a one-period snapshot
dimensions on specific managerial accounting decisions that are
that provides information only about the activities of a single period
reflected in BTDs. For instance, several studies document a negative
(Comprix et al., 2011). Time-series variability in BTDs has appeal as a
relation between governance strength and earnings management
measure in that it arguably contains information about other aspects
(e.g., Cornett et al., 2008; Chung et al., 2002; Klein, 2002a; Beasley,
of a firm's underlying economic fundamentals, including risk and
Carcello, Hermanson, & Lapides, 2000; DeChow, Sloan, & Sweeney,
aggressive reporting practices, that stem from a series of managerial
1996; Beasley, 1996), and other studies provide mixed evidence on the
decisions and activities over time (Dhaliwal et al., 2008). Some studies
impact of governance on aggressive tax planning/reporting (e.g., Lanis
have recently begun to explore a multi-period measure of BTDs, finding
& Richardson, 2011; Minnick & Noga, 2010; Khurana & Moser, 2009).7
it (along with levels in most cases) to be associated with uncertainty in
In the current study, I extend the prior literature by examining whether
the market, cost of debt, and cost of equity capital (Comprix et al., 2011;
corporate governance strength (specifically monitoring of management
Ayers et al., 2010; Dhaliwal et al., 2008). By examining both levels of and
by institutional shareholders) impacts BTDs more broadly, going beyond
volatility in BTDs, the aim is to more completely capture the current and
aggressive reporting and capturing information and uncertainty related
ongoing uncertainty in the information about a firm that is contained
to non-aggressive decisions as well.
in BTDs.
If the positive implications of BTDs discussed above dominate on
average (e.g., Atwood et al., 2010; Desai & Dharmapala, 2009; Wilson,
3.2. Empirical model
2009; Hanlon et al., 2005), then I expect a positive association between
institutional ownership and BTDs. However, if the negative implications
My base regression model tests for the associations between
discussed above dominate on the whole (e.g., Comprix et al., 2011;
properties of BTDs (levels and time-series variability, separately) and
Ayers et al., 2010; Dhaliwal et al., 2008), then higher levels of external
the level of institutional ownership (i.e., focuses on H1). I estimate
monitoring by institutions are expected to result in lower BTDs. Since
two-way (firm and year) fixed-effects regression models to examine
the bulk of the U.S.-based evidence on BTD magnitudes (discussed
these associations, specified as follows:
earlier) links BTDs with uncertainty-related information and economic
costs, I hypothesize a negative relation between BTDs and institutional
AbsBTDit ¼ α i þ γt þ β 1 InstOwnit þ β 2 CeoChairit þ β3 CEOTenit
ownership levels as follows:
þβ4 CEOCompit þ β5 CEOStockit þ β6 StockMixit
H1. Total book–tax differences are decreasing in the level of þβ7 BonusMixit þ β 8 Invent it þ β9 CapIntensit þ β10 Intangit ð1Þ
institutional ownership.
þβ 11 Debt it þ β12 Sizeit þ β 13 Growthit þ β 14 RDit þ β 15 Advit
þβ 16 ROAit þ β17 NOLit þ β 18 ForOpsit þ ε it
7
Khurana and Moser (2009) use permanent BTDs as one of their proxies for tax
8
aggressiveness, and the governance dimension they study is institutional ownership, I use absolute values as my measure of BTD levels to account for the notion that both
similar to the present study. However, the current study focuses on broader implications positive and negative BTDs convey information and uncertainty (Hanlon & Heitzman,
of BTDs (including permanent ones) vs. using them to proxy for a particular reporting 2010) and to be consistent with recent related research (Comprix et al., 2011; Dhaliwal
decision. Specifically, Khurana and Moser (2009) use raw values of permanent BTDs to et al., 2008). Examination of whether the information-related implications of BTDs or
measure tax aggressiveness, whereas I use absolute values to capture the information BTDs' associations with governance depend on the sign of the BTDs is beyond the scope
content in positive and negative BTDs. of this study but would be an interesting avenue for future research.
258 J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269
VarBTDit ¼ α i þ γ t þ β1 InstOwnit þ β 2 CeoChairit þ β3 CEOTenit
þβ4 CEOCompit þ β5 CEOStockit þ β6 StockMixit
þβ7 BonusMixit þ β 8 Invent it þ β9 CapIntensit þ β10 Intangit
þβ11 Debt it þ β12 Sizeit þ β 13 Growthit þ β14 RDit þ β 15 Advit
þβ 16 ROAit þ β 17 NOLit þ β 18 ForOpsit þ β 19 MBTDit þ εit
where:
AbsBTDit the absolute value of book–tax differences scaled by
prior year total assets for firm i in year t,
VarBTDit the standard deviation of book–tax differences scaled by
prior year total assets for firm i over the five year period
from year t − 4 to year t,
InstOwnit the mean percentage of firm i's stock owned by
institutional shareholders across all report dates
(generally quarterly) for year t in the Thomson Reuters
institutional holdings database,
CEOChairit an indicator variable coded 1 if the CEO for firm i in
year t is also the chair of the board of directors for firm
i in year t, 0 otherwise,
CEOTenit the number of years the CEO has been employed by firm
i as of the end of year t,
CEOCompit total compensation for the CEO of firm i in year t scaled
by prior year total assets,
CEOStockit the percentage of firm i's stock owned by the CEO at the
end of year t,
StockMixit the percentage of total compensation made up of stock
option grants for the five highest paid executives for
firm i in year t,
BonusMixit the percentage of total compensation made up of
bonuses for the five highest paid executives for firm i
in year t,
Inventit inventory adjusted for any LIFO reserve for firm i in
year t scaled by prior year total assets,
CapIntensit net property, plant, and equipment for firm i in year t
scaled by prior year total assets,
Intangit intangible assets for firm i in year t scaled by prior year
total assets,
Debtit the sum of short-term and long-term debt for firm i in
year t scaled by prior year total assets,
Sizeit the natural log of total assets for firm i in year t,
Growthit the change in total assets from year t − 1 to year t for
firm i scaled by prior year total assets,
RDit research and development expense for firm i in year t
scaled by prior year total assets,
Advit advertising expense for firm i in year t scaled by prior
year total assets,
ROAit pretax income for firm i in year t scaled by prior year
total assets,
NOLit the change in the net operating loss carryforward from
year t − 1 to year t for firm i scaled by prior year total
assets,
ForOpsit an indicator variable coded 1 foreign pretax income for
firm i in year t is non-zero, 0 otherwise, and
MBTDit the mean value of book–tax differences scaled by prior
year total assets for firm i over the five year period
from year t − 4 to year t.
The dependent variables are estimates of book–tax differences,
and as discussed previously, I measure them in terms of both levels
(AbsBTD) and time-series variability (VarBTD). Following much of
the recent prior research (e.g., Ayers et al., 2010; Frank et al., 2009;
Wilson, 2009; Dhaliwal et al., 2008; Desai & Dharmapala, 2006;
Hanlon et al., 2005), total book–tax differences are defined as pretax
financial statement income (less minority interest) less estimated
taxable income, where estimated taxable income is the sum of
current federal and foreign income tax expense grossed up by the top
ð2Þ statutory corporate tax rate. To test H1, I first estimate Eqs. (1) and (2)
basing AbsBTD and VarBTD on total book–tax differences (AbsBTD
(Total) and VarBTD(Total), respectively). I then test H2a and H2b by
estimating Eqs. (1) and (2) two additional times each, substituting the
dependent variables (AbsBTD and VarBTD) with the permanent
(AbsBTD(Perm) and VarBTD(Perm)) and temporary (AbsBTD(Temp)
and VarBTD(Temp)) components of book–tax differences, respectively.
Following Hanlon (2005), temporary BTDs are estimated as deferred
tax expense grossed up by the top statutory corporate tax rate.
Permanent BTDs are defined as the difference between total and
temporary BTDs (Frank et al., 2009).
InstOwn represents the level of institutional ownership and is the
primary independent variable of interest. Consistent with my prediction
of a negative association between InstOwn and total book–tax differences,
I expect a negative coefficient on InstOwn in the AbsBTD(Total) and
VarBTD(Total) models (H1). Similarly, a negative coefficient on InstOwn
in the AbsBTD(Perm) and VarBTD(Perm) models would support H2a,
and a negative coefficient on InstOwn in the AbsBTD(Temp) and VarBTD
(Temp) models would support H2b.
CEOChair, CEOTen, CEOComp, CEOStock, StockMix, and BonusMix are
included in the models to control for the potential effects on firms'
reporting behavior of entrenchment- and compensation-related
characteristics of the CEO and other executives. CEOChair indicates
observations for which the CEO is also the chair of the board of
directors. I control for this role duality on the part of the CEO to account
for its potential to entrench the CEO and make him/her more powerful
within the firm. For example, among other things, the chair of the board
has the power to call meetings, set the agenda, and control information
available to other board members (Jensen, 1993). Therefore, CEO-chair
duality may allow the CEO to exert some influence over the body that
supervises him/her. Although empirical evidence on the impact of
CEO-chair duality on reporting behavior is mixed (e.g., Cornett et al.,
2008; Erickson, Hanlon, & Maydew, 2006; Davidson, Jiraporn, Kim, &
Nemec, 2004; Beasley et al., 2000; Beasley, 1996; DeChow et al.,
1996), I predict a positive coefficient on CEOChair.
CEOTen controls for the length of time that the CEO has been with
the firm. A CEO with a longer tenure arguably has a stronger
understanding of his/her firm and its industry and therefore may be
a more effective manager (e.g., Cornett et al., 2008; Alderfer, 1986). On
the other hand, the longer a CEO's tenure with the firm, the more
power one might expect him/her to have (e.g., Hermalin & Weisbach,
1988), which potentially has implications for entrenchment. Empirically,
results in prior research do not consistently show an association
between CEO tenure and reporting behavior (e.g., Cornett et al., 2008;
Erickson et al., 2006). Accordingly, I do not make a prediction about
the sign of the coefficient on CEOTen.
CEOComp and CEOStock serve as controls for the overall levels of the
CEO's compensation and stock ownership in the firm, respectively.
Fields, Lys, and Vincent (2001) summarize the literature on accounting
choice, a branch of which generally suggests that managers opportunis-
tically use discretion in accounting to maximize compensation.9
Moreover, Rego and Wilson (2008) find a positive association between
total CEO and CFO compensation and tax reporting aggressiveness.
With respect to stock ownership, agency theory suggests that a
manager's incentives are more closely aligned with those of external
9
Fields et al. (2001) note that studies in the literature examining the association
between accounting choice and manager compensation generally focus only on a
component of total compensation, such as bonuses or stock-based compensation. Cited
examples include Healy (1985), Holthausen, Larcker, and Sloan (1995), and Guidry,
Leone, and Rock (1999). Fields et al. (2001) argue that consideration of total
compensation is more appropriate.
 J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269
shareholders where he/she owns more stock in the firm (Jensen &
Meckling, 1976). However, some studies document a positive relation
between CEO stock ownership and aggressive financial (e.g., Cheng &
Warfield, 2005; Klein, 2002a) and tax (Lanis & Richardson, 2011)
reporting. Based on these prior findings, I predict a positive coefficient
on CEOComp and make no prediction about the sign of the coefficient
on CEOStock.
I employ StockMix and BonusMix to control for the degree to which
total compensation for the five highest-paid executives in the firm
(including the CEO) is derived from equity compensation (e.g., stock
options and/or restricted stock grants) and bonuses, respectively. 10
Prior evidence suggests a negative association between aggressive
tax reporting, measured based on book–tax differences, and equity
compensation for poorly governed firms (Desai & Dharmapala, 2006).
However, other studies argue and/or find that equity compensation
and aggressive financial reporting practices are positively associated
(e.g., Cheng & Warfield, 2005; Jensen, 2005; Aboody & Kasznik, 2000).
Given that BTDs are reflective of both, I make no prediction about the
sign of the coefficient on StockMix. On the other hand, prior research
shows bonus compensation to be positively associated with aggressive
reporting in both the tax (e.g., Hanlon, Mills, & Slemrod, 2007) and
financial (e.g., Guidry et al., 1999) domains. Therefore, BonusMix is
expected to have a positive coefficient.
Invent, CapIntens, Intang, Debt, Size, Growth, RD, Adv, ROA, NOL, and
ForOps control for various other firm-level characteristics that likely
influence the properties of BTDs. Invent is included to control for
accounting rule differences for book and tax purposes that relate to
inventory costing (e.g., cost flow assumption choice and IRC §263A).
Similarly, CapIntens and Intang control for the influence of differences
in depreciation and amortization accounting rules for book and tax
purposes on BTDs. I expect the coefficients on all of these variables
to be negative because BTDs for firms with more inventory, property,
plant, and equipment, and/or intangible assets are likely to arise to a
large extent from mechanical differences in the computation of cost of
goods sold, depreciation, and amortization under the two accounting
regimes. Such differences should generally be temporary and relatively
consistent from year to year.
I include Debt in the models to control for firm leverage. Prior
evidence is mixed on the relation between leverage and BTDs (e.g.,
Frank et al., 2009; Mills & Newberry, 2001). Accordingly, I make no
prediction about the sign of the coefficient on Debt. Similarly, Size
controls for firm size, and I make no prediction about the sign of its
coefficient based on mixed results from prior studies (e.g., Manzon
& Plesko, 2002; Mills & Newberry, 2001).
The models also include controls for both present (Growth) and
potential future (RD, Adv) growth of the firm. Prior evidence suggests
a positive association between firm growth and book–tax differences
(Manzon & Plesko, 2002). Moreover, high growth firms are likely to be
more volatile on a number of dimensions (profitability, cash flows, etc.).
Therefore, I expect all three of these variables to be positively related
with BTDs.
ROA accounts for the impact of firm performance (i.e., profitability)
on the characteristics of BTDs. Some prior studies find a positive
association between levels of BTDs and firm profitability (e.g., Chen,
Chen, Cheng, & Shevlin, 2010; Frank et al., 2009; Manzon & Plesko,
2002). However, better performing firms are also likely to be less
volatile in general, which would suggest a negative association between
profitability and time-series variation in BTDs. Accordingly, I make no
prediction about the sign of the coefficient on ROA. NOL controls for
10
I base these variables on the compensation structure for the five highest paid
executives in the firm to acknowledge the role of non-CEO executives (e.g., the CFO)
in the financial and tax reporting process. Nonetheless, I also re-estimate Eqs. (1)
and (2) basing StockMix and BonusMix only on the CEO's compensation structure,
and the results are virtually identical to the main results.
259
changes in net operating loss carryforwards, and I include this control
for two reasons. First, firms with net operating loss carryforwards likely
have different incentives to tax plan from other firms, which suggests
an association with BTDs (Chen et al., 2010; Frank et al., 2009). Second,
changes in net operating loss carryforwards also impact book–tax
differences via their effects on deferred taxes and/or the valuation
allowance account. I make no prediction about the sign of the coefficient
on NOL.
I also control for whether or not a firm has foreign operations
(ForOps). Although prior evidence is mixed on the impact of foreign
operations on BTDs (e.g., Chen et al., 2010; Frank et al., 2009; Manzon
& Plesko, 2002), I expect a positive coefficient on this variable because
firms with foreign operations are more complex in general, likely
generating higher levels of and volatility in BTDs.
Finally, in the VarBTD models, I include MBTD to control for the
average level of BTDs over the same period used to derive the time-
series variability measure (dependent variable) discussed above. This
control is important because much of the information contained in a
standard deviation is relative to the magnitude of the variable on
which it is computed. Book–tax differences (total, permanent, and
temporary) for purposes of deriving the MBTD variable are computed
in the same manner as that described above for VarBTD. The version
of MBTD (i.e., based on total, permanent, or temporary book–tax
differences) is matched with its corresponding version of VarBTD in
each estimation of Eq. (2). I make no prediction as to the sign of the
coefficient on MBTD.
3.3. Data and descriptive statistics
The empirical tests in this study require data on stock holdings by
institutional investors, financial statement information, characteristics
of firm executives, and boards of directors (including committee
memberships). The sample selection process, summarized in Table 1,
begins with all firm-year observations available for the period 1998
through 2009 in the Thomson–Reuters Institutional Holdings (13F)
database, which provides information on institutional ownership
(93,679 observations for 14,764 firms). I eliminate firm-year observa-
tions for which no matching financial statement, executive, and board
of director data are available on the Compustat, Execucomp, and
RiskMetrics (ISS) Directors databases, respectively (78,297 observa-
tions for 12,277 firms).11 I then eliminate observations relating to
firms in regulated (SIC 49) and financial services (SIC 60–69) industries
(3182 observations for 554 firms) and observations with book value of
equity less than or equal to zero (1692 observations for 161 firms).
Finally, observations lacking data for the computation of dependent or
independent variables (3233 observations for 406 firms) and obser-
vations associated with firms that are present in the sample for less
than two of the twelve sample years (205 observations for 205 firms)
are eliminated. 12 The final sample consists of 7070 firm-year observa-
tions for 1161 firms. I winsorize each of the continuous variables at
the 1st and 99th percentiles to minimize the effects of outliers.
Table 2 reports descriptive statistics for the sample. Absolute values
of BTDs (AbsBTD) show mean (median) values based on total,
permanent, and temporary BTDs of 0.0431 (0.0286), 0.029 (0.0141),
and 0.0331 (0.0211), respectively. Similarly, the mean (median) values
for the book–tax difference variability measures (VarBTD) based on
total, permanent, and temporary BTDs are 0.0457 (0.0313), 0.0305
(0.0125), and 0.0395 (0.028), respectively. The statistics for institutional
11
The earliest years for which the required data on characteristics of executives and
audit committees are available in the Execucomp and RiskMetrics (ISS) databases are
1992 and 1998, respectively. Accordingly, my sample period begins in 1998.
12
I place this restriction on the sample because the firm-fixed-effects regression
methodology requires at least two observations in the sample for each observational
unit (i.e., firm).
260 J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269
Table 1
Sample composition.
Firm-Year Firms
Observations
Thomson–Reuters firms for fiscal years 1998–2009 93,679 14,764
Less:
Observations for which no matching data are available (78,297) (12,277)
in Compustat, Execucomp, or ISS
Observations relating to firms in regulated (SIC 49) (3182) (554)
and financial services (SIC 60–69) industries
Observations with book value of equity less than or (1692) (161)
equal to zero
Observations missing data for regression variables (3233) (406)
Observations associated with firms that are present in (205) (205)
the sample for less than two sample years
Final sample 7070 1161
ISS refers to the ISS Governance Services corporate director database, which contains
information on various director characteristics (including CEO/chair duality and
committee membership).
ownership (InstOwn) indicate that about 74 (76)% of sample firms' stock
is owned by institutions at the mean (median).13
With respect to management characteristics, CEOChair indicates
that the CEO is also the chair of the board of directors for over 70%
of my sample observations. Moreover, the average CEO in my sample
has been with his/her firm for about 12 years (CEOTen) and owns
about 2% of his/her firm's stock (CEOStock). In terms of compensation,
stock-based pay (StockMix) and bonuses (BonusMix) make up about
28 and 17% of total compensation, respectively, for the five highest
paid executives of the firm on average.
Notable statistics for the control variables include ROA, which
suggests that sample firms are profitable on average, with a mean
(median) value of 0.1053 (0.099). The average firm in my sample
shows positive growth in assets (mean 0.1034; median 0.0698) over
the sample period as well. Finally, over 60% of sample observations
have foreign operations of some kind.
Pearson (upper diagonal) and Spearman (lower diagonal) correlation
coefficients for the independent variables from Eqs. (1) and (2)
are reported in Table 3. The primary concern is the potential for harmful
collinearity among any of the independent variables. This concern
does not appear to be an issue with the one possible exception of the
correlation between CEOComp and Size, for which the Pearson
(Spearman) correlation coefficient is −0.42 (−0.63). To ensure that
this high correlation does not drive results for the hypothesis tests, I
re-estimate Eqs. (1) and (2) omitting CEOComp as part of my sensitivity
analysis (discussed further later). Otherwise, besides those discussed
above, all other correlation coefficients among variables that appear
in the same regression model together are less than 0.55, and only two
other pairs of variables are correlated at higher than 0.4, one on the
Pearson diagonal only (ROA and Growth; CapIntens and MBTD(Temp)).
4. Empirical results
4.1. Main regression analysis
Table 4 reports the main regression results. Panel A shows the
results for each of the three versions of Eq. (1) — based on total BTDs
13
The average institutional ownership values for my sample firms are higher than
those reported in some recent studies. For example, Khurana and Moser (2009) report
an average of 60.6%, and Khan, Dharwadkar, and Brandes (2005) report an average of
55.8%. A number of the independent variables necessary for my regression models
come from the Execucomp and RiskMetrics (ISS) Directors databases. The requirement
for matching data from these databases results in a final sample that reflects larger
firms (mean Size of 7.35 vs. 6.26 without the data restriction) with higher levels of
institutional ownership (74.4% vs. 51.3% without the data restriction). Although the
values for other variables in this larger unrestricted sample are comparable with those
in the final sample, these differences may affect the generalizability of my results to
some extent, and this is an acknowledged limitation of the study.
(Total), permanent BTDs (Perm), and temporary BTDs (Temp). Overall
R-squared values range from 0.0679 in the Temp model to 0.1020 in
the Perm model. In each of the three specifications, the F statistic for
the test of the existence of fixed effects is highly significant (pb 0.01),
suggesting that my use of a panel data methodology is appropriate.
With respect to the hypothesized institutional ownership variable,
InstOwn is negative and significant in the Total (pb 0.05) and Perm
(pb 0.01) models but is insignificantly negative in the Temp model.
Coefficients on the variables measuring management characteristics
are generally of the sign predicted (where applicable) but are also
generally not significant. CEOChair is positive in all three models as
expected but is significant only in the Total (pb 0.05) and Perm
(pb 0.10) models. Similarly, as predicted, CEOComp and BonusMix are
positive in all three models. However, CEOComp is significant only in
the Perm model (pb 0.05), and BonusMix is not significant in any of
the three models. CEOTenure, CEOStock, and StockMix are insignificant
in all three models.
Several of the control variables show significant associations with
BTD levels. As expected, Intang (Growth) is significantly negative
(positive) at the 0.01 level in all three models. Size and ROA are also
significantly negative at least at the 0.10 and 0.01 levels, respectively,
in every model. Invent and Debt have negative coefficients in all three
models, and they are significant at least at the 0.10 and 0.01 levels,
respectively, in the Total and Temp models. Conversely, RD is positive
in all three models but is significantly so only in the Total and Perm
models (p b 0.01). NOL is positive in every model, albeit significantly
so (p b 0.01) only in the Perm model, while CapIntens is marginally
significantly negative (p b 0.10) in the Perm model but is insignificant
in the other two. Finally, Adv and ForOps are both insignificant in all
three models.
Panel B of Table 4 reports the results for each of the three versions
of Eq. (2) — based on total (Total), permanent (Perm), and temporary
(Temp) BTDs. Overall R-squared values range from 0.0381 in the
Temp model to 0.0874 in the Total model. The F statistic for the test
of the existence of fixed effects is again highly significant (p b 0.01)
in each of the three specifications, suggesting that my use of a panel
data methodology is appropriate for the VarBTD models as well.
Similar to the results for the AbsBTD models (shown in Panel A),
InstOwn is negative and significant in the Total and Perm models
(p b 0.01). However, the coefficient on InstOwn is also significantly
negative (p b 0.05) in the Temp model, a stronger result than that in
Panel A.
With respect to the variables capturing executives' characteristics,
CEOComp is positive and significant (pb 0.01) only in the Perm model as
in Panel A. Similarly, CEOChair is positive and significant (pb 0.05) in
two of the three models, Total and Temp (vs. Total and Perm in Panel
A), and is insignificantly positive in the third. The results for CEOTen,
StockMix, and BonusMix are stronger than those for the AbsBTD models.
Specifically, CEOTen is significantly negative (pb 0.05) in the Total model
and remains insignificantly so in the others. StockMix and BonusMix
remain positive in every case, but StockMix is significant (pb 0.01) in the
Total and Temp models, and BonusMix is significant (pb 0.05) in the
Perm model. CEOStock remains insignificant in every model.
The results for the other independent variables are generally
consistent with those reported in Panel A and are stronger in several
cases. Intang, Size, and ROA remain negative and significant (at least at
the 0.05 level) in all three models, while Growth continues to show
positive and significant (p b 0.01) coefficients in all three models.
Invent remains negative in all three models but is now significant at
least at the 0.10 level in all three (vs. in only the Total and Temp
models in Panel A). Similarly, CapIntens becomes significantly negative
(pb 0.01) in all three models (vs. being marginally significantly negative
in only the Perm model in Panel A).
Adv and ForOps show insignificant coefficients of mixed sign
across the AbsBTD models, but both become positive and significant
at least at the 0.05 level in the VarBTD(Total) and VarBTD(Perm)
 J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269 261

Table 2
Descriptive statistics.

Full sample (n = 7070)

Variable Mean Std. Dev. Min 25% Median 75% Max

Continuous
AbsBTD (Total) 0.0431 0.0476 0.0004 0.0133 0.0286 0.0543 0.2766
AbsBTD (Perm) 0.0290 0.0451 0.0002 0.0054 0.0141 0.0317 0.2798
AbsBTD (Temp) 0.0331 0.0389 0.0000 0.0085 0.0211 0.0414 0.2209
VarBTD (Total) 0.0457 0.0447 0.0047 0.0184 0.0313 0.0551 0.2647
VarBTD (Perm) 0.0305 0.0501 0.0014 0.0062 0.0125 0.0290 0.3023
VarBTD (Temp) 0.0395 0.0373 0.0037 0.0171 0.0280 0.0473 0.2319
InstOwn 74.3587 17.3007 8.3152 63.2468 76.4759 87.4753 100
CEOTen 12.2149 11.0636 0 3 8 19 44
CEOComp 0.0037 0.0048 0.0001 0.0010 0.0021 0.0043 0.0314
CEOStock 2.3192 6.0472 0 0.0804 0.3046 1.2067 100
StockMix 28.1747 29.0561 0 0 22.4913 52.6045 99.4857
BonusMix 17.4136 17.7690 0 0.7410 13.3057 27.9901 97.8516
Invent 0.1516 0.1423 0 0.0325 0.1230 0.2211 0.6613
CapIntens 0.3151 0.2446 0.0181 0.1322 0.2500 0.4252 1.1092
Intang 0.1403 0.1502 0 0.0154 0.0929 0.2187 0.6825
Debt 0.1878 0.1647 0 0.0224 0.1742 0.2956 0.6940
Size 7.3485 1.4398 4.7253 6.3099 7.1373 8.2174 11.2630
Growth 0.1034 0.2093 −0.3187 −0.0101 0.0698 0.1683 1.1102
RD 0.0346 0.0524 0 0 0.0005 0.0525 0.2336
Adv 0.0151 0.0325 0 0 0 0.0128 0.1821
ROA 0.1053 0.1138 −0.2325 0.0416 0.0990 0.1672 0.4672
NOL 0.0054 0.0369 −0.1143 0 0 0 0.2138
MBTD (Total) 0.0150 0.0375 −0.0979 −0.0044 0.0134 0.0325 0.1518
MBTD (Perm) 0.0126 0.0315 −0.0818 −0.0010 0.0083 0.0217 0.1574
MBTD (Temp) 0.0023 0.0302 −0.0942 −0.0124 0.0017 0.0151 0.1133

Categorical (% w/ value of 1)
CEOChair 70.64%
ForOps 61.84%

AbsBTD is the absolute value of book–tax differences scaled by prior year total assets for firm i in year t; VarBTD is the standard deviation of book–tax differences scaled by prior year
total assets for firm i over the five year period from year t − 4 to year t; InstOwn is the mean percentage of firm i's stock owned by institutional shareholders across all report dates
(generally quarterly) for year t in the Thomson–Reuters institutional holdings database; CEOTen is the number of years the CEO has been employed by firm i as of the end of year t;
CEOComp is total compensation for the CEO of firm i in year t scaled by prior year total assets; CEOStock is percentage of firm i's stock owned by the CEO at the end of year t; StockMix
is the percentage of total compensation made up of stock option grants for the five highest paid executives for firm i in year t; BonusMix is the percentage of total compensation
made up of bonuses for the five highest paid executives for firm i in year t; Invent is inventory adjusted for any LIFO reserve for firm i in year t scaled by prior year total assets;
CapIntens is net property, plant, and equipment for firm i in year t scaled by prior year total assets; Intang is intangible assets for firm i in year t scaled by prior year total assets;
Debt is the sum of short-term and long-term debt for firm i in year t scaled by prior year total assets; Size is the natural log of total assets for firm i in year t; Growth is the change
in total assets from year t −1 to year t for firm i scaled by prior year total assets; RD is research and development expense for firm i in year t scaled by prior year total assets; Adv is
advertising expense for firm i in year t scaled by prior year total assets; ROA is pretax income for firm i in year t scaled by prior year total assets; NOL is the change in the net
operating loss carryforward from year t − 1 to year t for firm i scaled by prior year total assets; MBTD is the mean value of book–tax differences scaled by prior year total assets
for firm i over the five year period from year t − 4 to year t; (Total), (Perm), and (Temp) indicate whether AbsBTD, VarBTD, and MBTD are computed based on total, permanent,
or temporary book–tax differences, respectively; CEOChair is an indicator variable coded 1 if the CEO for firm i in year t is also the chair of the board of directors for firm i in
year t, 0 otherwise; and ForOps is an indicator variable coded 1 foreign pretax income for firm i in year t is non-zero, 0 otherwise.

models. Conversely, Debt, which is negative and significant in the
Total and Temp models in Panel A, becomes insignificant across all
three VarBTD models. Similarly, NOL is insignificantly positive across
all three VarBTD models (vs. being significantly so in the Perm
model in Panel A). RD is the only variable with significant coefficients
of opposite sign between Panels A and B. Specifically, RD is
significantly negative (p b 0.05) in the VarBTD(Temp) model and is
insignificant in the other two VarBTD models (vs. being significantly
positive in the Total and Perm models in Panel A). Finally, MBTD is
negative and highly significant (p b 0.01) in all three models.
The results in Table 4 provide evidence that is consistent with H1
and H2a; the coefficients on InstOwn are consistently negative and
significant in the Total (p b 0.05) and Perm (p b 0.01) models. H2b is
only weakly supported, with coefficients on InstOwn that are negative
in the Temp models for both AbsBTD and VarBTD, albeit significant
(p b 0.05) only in the VarBTD(Temp) model. Overall, these findings
suggest that greater monitoring by institutional investors results in
lower BTDs, and that this association is driven primarily by the
permanent component of BTDs. As previously discussed, this stronger
result for permanent differences is not altogether surprising given
that permanent BTDs likely contain more uncertainty than do
temporary ones (Comprix et al., 2011). The results also consistently
suggest that CEO-chair duality and asset growth are associated with
higher levels of and variability in BTDs, whereas inventory, intangible
assets, firm size, and profitability are associated with lower levels of
and variability in BTDs.
4.2. Supplemental analyses
4.2.1. Accounting for board and audit committee characteristics
The main analyses in this study focus on monitoring of management
by external institutional shareholders. I perform additional analyses that
also account for monitoring by the board of directors. Specifically, I re-
estimate Eqs. (1) and (2) adding variables to represent the percentage
of independent directors on the board (IndBOD%) and audit committee
(IndAC%) and the size of the board (BODSize) and audit committee
(ACSize).
Fama (1980) and Fama and Jensen (1983) argue that independent
board members (i.e., board members not otherwise affiliated with the
company) play an important role in the monitoring of management and
in the prevention of upper management from transferring shareholder
wealth. A number of studies (e.g., Kim, 2009; Brickley, Coles, & Terry,
 262
Table 3

J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269
Pearson/Spearman correlation matrix for final sample.

InstOwn CEO CEO CEO CEO Stock Bonus Invent CapIntens Intang Debt Size Growth RD Adv ROA NOL ForOps MBTD MBTD MBTD
Chair Ten Comp Stock Mix Mix (Total) (Perm) (Temp)

InstOwn −0.04 −0.09 0.07 −0.25 −0.16 −0.09 −0.03 −0.03 0.12 −0.03 0.01 0.05 0.00 0.01 0.03 −0.01 0.08 0.11 0.06 0.07
CEOChair −0.06 0.12 −0.06 0.07 0.11 0.08 0.00 0.06 0.00 0.11 0.20 0.01 −0.06 0.01 0.02 −0.02 0.04 0.03 −0.01 0.05
CEOTen −0.04 0.13 −0.11 0.30 −0.05 0.07 0.00 0.07 −0.04 0.00 0.09 0.03 −0.07 0.00 0.09 −0.04 −0.02 0.04 0.00 0.05
CEOComp 0.18 −0.11 −0.09 0.00 0.28 −0.07 −0.04 −0.14 −0.03 −0.22 −0.42 0.25 0.26 0.06 0.22 0.04 −0.09 −0.02 0.15 −0.19
CEOStock −0.09 0.06 0.34 0.14 −0.06 0.01 0.02 0.01 −0.06 −0.11 −0.19 0.01 −0.06 0.10 0.06 −0.01 −0.11 0.00 0.00 −0.01
StockMix −0.21 0.11 −0.05 0.18 −0.14 −0.12 −0.09 −0.02 −0.05 0.01 0.08 0.15 0.22 0.00 0.05 0.07 0.00 −0.05 0.03 −0.08
BonusMix −0.13 0.10 0.02 −0.04 −0.03 0.10 0.08 0.09 −0.02 0.12 0.12 0.11 −0.15 −0.01 0.17 −0.06 −0.04 0.04 −0.06 0.11
Invent −0.04 0.01 −0.03 −0.01 0.05 −0.08 0.05 −0.14 −0.11 0.06 −0.06 0.08 −0.23 0.22 0.07 −0.04 −0.13 −0.10 −0.07 −0.05
CapIntens −0.09 0.07 0.07 −0.20 0.04 −0.01 0.09 0.02 −0.29 0.35 0.16 0.18 −0.34 −0.02 0.08 −0.03 −0.22 0.25 −0.10 0.40
Intang 0.13 0.01 −0.02 −0.01 −0.07 −0.08 −0.01 −0.04 −0.30 0.09 0.08 0.23 0.08 −0.04 0.00 0.05 0.15 −0.03 −0.01 −0.03
Debt −0.05 0.12 −0.02 −0.31 −0.04 0.02 0.12 0.10 0.35 0.10 0.31 0.20 −0.25 −0.08 −0.18 0.03 −0.03 −0.01 −0.17 0.17
Size 0.01 0.20 0.05 −0.63 −0.32 0.05 0.08 −0.03 0.16 0.11 0.36 0.06 −0.10 0.00 0.04 −0.02 0.23 0.10 −0.01 0.13
Growth 0.08 0.00 0.09 0.19 0.04 0.11 0.16 0.04 0.13 0.09 0.05 0.05 0.17 0.03 0.45 0.03 −0.04 0.16 0.17 0.02
RD −0.04 −0.01 −0.07 0.19 −0.15 0.17 −0.12 −0.14 −0.38 0.12 −0.24 −0.09 0.04 −0.11 0.02 0.10 0.23 −0.05 0.21 −0.27
Adv 0.06 0.01 0.00 0.05 0.00 −0.02 −0.04 0.16 −0.04 −0.01 −0.11 0.03 0.01 −0.08 0.16 −0.02 −0.09 0.00 0.07 −0.07
ROA 0.03 0.02 0.11 0.17 0.02 0.04 0.16 0.04 0.08 −0.01 −0.21 0.04 0.53 −0.02 0.14 −0.17 −0.06 0.33 0.32 0.07
NOL −0.04 0.01 −0.01 −0.04 −0.01 0.04 −0.06 0.00 −0.02 0.03 0.04 0.02 −0.06 0.03 0.00 −0.16 0.03 −0.12 −0.08 −0.06
ForOps 0.06 0.04 −0.03 −0.11 −0.18 −0.01 −0.03 −0.04 −0.21 0.19 −0.02 0.23 −0.04 0.34 −0.10 −0.06 0.04 −0.03 0.07 −0.10
MBTD (Total) 0.08 0.06 0.07 −0.05 −0.01 −0.05 0.02 −0.13 0.22 −0.04 −0.02 0.12 0.20 −0.03 −0.04 0.31 −0.09 −0.02 0.61 0.55
MBTD (Perm) 0.04 0.00 0.03 0.12 −0.02 −0.02 −0.07 −0.01 −0.09 −0.01 −0.23 −0.02 0.18 0.25 0.07 0.33 −0.04 0.09 0.50 −0.30
MBTD(Temp) 0.05 0.07 0.03 −0.16 0.00 −0.04 0.09 −0.07 0.33 −0.02 0.19 0.15 0.05 −0.27 −0.10 0.06 −0.06 −0.10 0.59 −0.26

Pearson and Spearman correlation coefficients appear in the upper and lower diagonals, respectively. Bolded font indicates a statistically significant correlation at the p ≤0.05 level. InstOwn is the mean percentage of firm i's stock owned by
institutional shareholders across all report dates (generally quarterly) for year t in the Thomson–Reuters institutional holdings database; CEOChair is an indicator variable coded 1 if the CEO for firm i in year t is also the chair of the board of
directors for firm i in year t, 0 otherwise; CEOTen is the number of years the CEO has been employed by firm i as of the end of year t; CEOComp is total compensation for the CEO of firm i in year t scaled by prior year total assets; CEOStock is
percentage of firm i's stock owned by the CEO at the end of year t; StockMix is the percentage of total compensation made up of stock option grants for the five highest paid executives for firm i in year t; BonusMix is the percentage of total
compensation made up of bonuses for the five highest paid executives for firm i in year t; Invent is inventory adjusted for any LIFO reserve for firm i in year t scaled by prior year total assets; CapIntens is net property, plant, and equipment for
firm i in year t scaled by prior year total assets; Intang is intangible assets for firm i in year t scaled by prior year total assets; Debt is the sum of short-term and long-term debt for firm i in year t scaled by prior year total assets; Size is the
natural log of total assets for firm i in year t; Growth is the change in total assets from year t − 1 to year t for firm i scaled by prior year total assets; RD is research and development expense for firm i in year t scaled by prior year total assets;
Adv is advertising expense for firm i in year t scaled by prior year total assets; ROA is pretax income for firm i in year t scaled by prior year total assets; NOL is the change in the net operating loss carryforward from year t − 1 to year t for firm i
scaled by prior year total assets; ForOps is an indicator variable coded 1 foreign pretax income for firm i in year t is non-zero, 0 otherwise; MBTD is the mean value of book–tax differences scaled by prior year total assets for firm i over the five
year period from year t − 4 to year t; and (Total), (Perm), and (Temp) indicate whether MBTD is computed based on total, permanent, or temporary book–tax differences, respectively.
Table 4
2-way fixed effects regression results.

Panel A: BTD levels

Dependent variable — AbsBTD

Total Perm Temp

Independent variables
(Predicted sign) Coeff t-stat Coeff t-stat Coeff t-stat

J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269
InstOwn (−) −0.00018 −2.20 ## −0.00037 −4.66 ### −0.00006 −0.84
Management characteristics
CEOChair (+) 0.00341 2.17** 0.00308 1.95 * 0.00153 1.06
CEOTen (?) −0.00001 −0.07 0.00003 0.39 0.00006 0.85
CEOComp (+) 0.26094 1.15 0.54119 2.51 ** 0.11747 0.67
CEOStock (?) −0.00005 −0.49 0.00001 0.10 −0.00007 −0.54
StockMix (?) 0.00004 1.06 0.00004 1.26 0.00003 0.90
BonusMix (+) 0.00006 1.43 0.00006 1.41 0.00001 0.18
Control variables
Invent (−) −0.03292 −1.87 * −0.00174 −0.11 −0.02609 −2.06 **
CapIntens (−) 0.00978 0.83 −0.01852 −1.88 * 0.00830 0.87
Intang (−) −0.05771 −5.71 *** −0.04021 −4.25 *** −0.02958 −3.87 ***
Debt (?) −0.03270 −3.97 *** −0.00712 −0.96 −0.03444 −5.20 ***
Size (?) −0.00660 −2.15 ** −0.01187 −4.29 *** −0.00492 −1.95 *
Growth (+) 0.05444 7.89 *** 0.02750 4.32 *** 0.04277 7.63 ***
RD (+) 0.18053 3.12 *** 0.26835 4.71 *** 0.03657 0.85
Adv (+) 0.03982 0.95 0.04815 1.38 −0.00699 −0.21
ROA (?) −0.12364 −9.05 *** −0.08378 −6.55 *** −0.09160 −9.13 ***
NOL (?) 0.03278 1.58 0.07356 3.21 *** 0.00227 0.13
ForOps (+) −0.00112 −0.44 0.00298 1.20 0.00064 0.29

N 7070 7070 7070

F-stat. (fixed effects) 2.98 (p b 0.01) 2.79 (p b 0.01) 2.62 (p b 0.01)
R-squared (overall) 0.1001 0.1020 0.0679

Panel B: BTD variability

Dependent variable — VarBTD

Total Perm Temp

Independent variables
(Predicted sign) Coeff t-stat Coeff t-stat Coeff t-stat

InstOwn (−) −0.00014 −2.58 ### −0.00035 −5.78 ### −0.00008 −1.65 ##
Management characteristics
CEOChair (+) 0.00269 2.30 ** 0.00180 1.49 0.00230 2.16 **
CEOTen (?) −0.00010 −2.14 ** −0.00006 −1.09 −0.00004 −0.84
CEOComp (+) 0.12054 0.79 0.52660 3.20 *** −0.09848 −0.82
CEOStock (?) 0.000002 0.03 0.00005 0.64 −0.00009 −1.21
StockMix (?) 0.00008 3.21 *** 0.00004 1.59 0.00012 5.78 ***
BonusMix (+) 0.00002 0.58 0.00007 2.32 ** 0.00001 0.30

(continued on next page)

263
 264
Table 4 (continued)
Panel B: BTD variability

J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269
Dependent variable — VarBTD

Total Perm Temp

Independent variables
(Predicted sign) Coeff t-stat Coeff t-stat Coeff t-stat

Control variables
Invent (−) −0.03239 −3.12 *** −0.02234 −1.92 * −0.01586 −1.92 *
CapIntens (−) −0.02681 −3.46 *** −0.03428 −4.68 *** −0.01806 −2.85 ***
Intang (−) −0.03518 −5.07 *** −0.01600 −2.11 ** −0.02222 −4.11 ***
Debt (?) −0.00639 −0.98 0.01064 1.59 −0.00132 −0.25
Size (?) −0.00827 −3.78 *** −0.01448 −6.26 *** −0.00978 −5.35 ***
Growth (+) 0.02952 6.21 *** 0.01483 2.84 *** 0.02319 5.66 ***
RD (+) −0.00968 −0.26 0.00929 0.20 −0.06999 −2.33 **
Adv (+) 0.05522 2.34 ** 0.05266 2.29 ** 0.01852 0.92
ROA (?) −0.04678 −6.24 *** −0.04011 −5.07 *** −0.02890 −4.67 ***
NOL (?) 0.02363 1.63 0.02806 1.49 0.00222 0.18
ForOps (+) 0.00617 3.25 *** 0.00832 3.72 *** 0.00249 1.54
MBTD (Total) (?) −0.22185 −6.25 ***
MBTD (Perm) (?) −0.13529 −2.26 **
MBTD (Temp) (?) −0.12054 −3.48 ***

N 7070 7070 7070

F-stat. (fixed effects) 9.42 (p b 0.01) 10.24 (p b 0.01) 10.35 (pb 0.01)
R-squared (overall) 0.0874 0.0624 0.0381

***, **, and * (###, ##, and #) indicate significance based on a two-tailed (one-tailed) test at the 1%, 5% and 10% levels, respectively. The reported t-statistics are based on Huber–White robust standard errors. The dependent variables are
AbsBTD, which is defined as the absolute value of book–tax differences scaled by prior year total assets for firm i in year t, and VarBTD, which is defined as the standard deviation of book–tax differences scaled by prior year total assets for firm
i over the five year period from year t − 4 to year t. InstOwn is the mean percentage of firm i's stock owned by institutional shareholders across all report dates (generally quarterly) for year t in the Thomson–Reuters institutional holdings
database; CEOChair is an indicator variable coded 1 if the CEO for firm i in year t is also the chair of the board of directors for firm i in year t, 0 otherwise; CEOTen is the number of years the CEO has been employed by firm i as of the end of
year t; CEOComp is total compensation for the CEO of firm i in year t scaled by prior year total assets; CEOStock is percentage of firm i's stock owned by the CEO at the end of year t; StockMix is the percentage of total compensation made up of
stock option grants for the five highest paid executives for firm i in year t; BonusMix is the percentage of total compensation made up of bonuses for the five highest paid executives for firm i in year t; Invent is inventory adjusted for any LIFO
reserve for firm i in year t scaled by prior year total assets; CapIntens is net property, plant, and equipment for firm i in year t scaled by prior year total assets; Intang is intangible assets for firm i in year t scaled by prior year total assets; Debt
is the sum of short-term and long-term debt for firm i in year t scaled by prior year total assets; Size is the natural log of total assets for firm i in year t; Growth is the change in total assets from year t − 1 to year t for firm i scaled by prior year
total assets; RD is research and development expense for firm i in year t scaled by prior year total assets; Adv is advertising expense for firm i in year t scaled by prior year total assets; ROA is pretax income for firm i in year t scaled by prior
year total assets; NOL is the change in the net operating loss carryforward from year t − 1 to year t for firm i scaled by prior year total assets; ForOps is an indicator variable coded 1 foreign pretax income for firm i in year t is non-zero, 0
otherwise; MBTD is the mean value of book–tax differences scaled by prior year total assets for firm i over the five year period from year t − 4 to year t; and (Total), (Perm), and (Temp) indicate whether AbsBTD, VarBTD, and MBTD are
computed based on total, permanent, or temporary book–tax differences, respectively.
 J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269 265

1994; Byrd & Hickman, 1992; Weisbach, 1988) empirically support this
argument with evidence that the effectiveness of board monitoring
increases with independence level in the contexts of firm performance
and market reactions to unexpected cash holdings for family firms, tender
offer bids, and poison pill adoptions.
In the context of financial and tax reporting, Amoah and Tang (2010)
find that firms with more independent boards are less likely to experience
shareholder litigation following a restatement. Further, other prior
research suggests that earnings appear to be managed less where the
board and/or audit committee is more independent (e.g., Klein, 2002a;
Beasley et al., 2000; DeChow et al., 1996; Beasley, 1996), and firms also
appear to be less tax aggressive where at least the board is more
independent (Lanis & Richardson, 2011). Similar to my hypotheses on
the impacts of institutional ownership on BTDs, I expect negative
coefficients on IndBOD% and IndAC%.
Jensen (1993) argues that very large boards are less likely to
function effectively and are easier for CEOs to control. Consistent
with this argument, Beasley (1996) documents a positive association
between board size and financial statement fraud. On the other hand,
Klein (2002b) argues that larger boards may result in improved
monitoring because they are better able to spread the committee
membership workload among directors such that, for example, the
firm is better able to maintain an independent audit committee.
Although these and other prior studies agree that board size should
impact monitoring quality, the evidence is mixed as to the direction
of its impact. Therefore, I make no prediction about the sign of the
coefficient on BODSize.
The effects of audit committee size on monitoring quality appear
more straightforward ex ante. Since 1999, the major stock
exchanges in the United States have required that listed companies
maintain audit committees of at least three independent members,
suggesting that regulators believe larger audit committees to be
more effective monitors and that audit committees had previously
been undersized on average. Consistent with this belief, Anderson,
Mansi, and Reeb (2004) find a negative relation between audit
committee size and cost of debt. To the extent that larger audit
committees are associated with higher-quality monitoring, I expect a
positive coefficient on ACSize.
Results appear in Table 5. Overall R-squared values and the results
for the control variables (untabulated) closely resemble those reported
in Table 4 for the main models. Of particular interest are the results for
InstOwn, which also remain consistent with those shown in Table 4.
Specifically, the coefficient on InstOwn is negative across all six
regressions and is significantly so (at least at the 0.05 level) in all but
the AbsBTD(Temp) model.
There is only weak evidence of an association between board
independence and BTDs. IndBOD% is negative (as expected) and
marginally significant in both Perm models (p b 0.10) and in the
VarBTD(Total) model (p b 0.05), suggesting weakly that more inde-
pendent boards are associated with lower permanent BTDs (both in
terms of levels and volatility). However, IndBOD% is insignificant in
the other three models. Further, IndAC% is insignificant in all but
the AbsBTD(Temp) model, providing no consistent evidence of an
association between audit committee independence and BTDs.
The results are stronger for board and audit committee size.
Consistent with predictions, BODSize is positive across all six models.
Further, it is significantly so in all three of the VarBTD models (at least
at the 0.05 level), suggesting that larger boards are associated with
more volatile BTDs. However, the results for BTD levels indicate that
large boards are associated only with higher levels of permanent
BTDs, as evidenced by the significant (p b 0.10) coefficient on BODSize
only in the AbsBTD(Perm) model. The relation between audit
committee size (ACSize) is highly significantly negative (p b 0.01) in
both Perm models but is insignificant in all of the others, indicating
that larger audit committees are associated with lower permanent
BTDs but do not impact the temporary component of BTDs.
Overall, these results suggest that the main findings (reported in
Table 4) are not impacted by the inclusion in the model of controls for
board and audit committee characteristics (i.e., internal monitoring).
Further, the results suggest at some level that stronger monitoring by
the board and audit committee results in lower permanent BTDs, in
terms of both levels and time-series variability.
4.2.2. Accounting for tax planning and earnings management
Ayers et al. (2010) find a negative relation between large changes
in BTDs and credit ratings, suggesting that BTDs (at least volatility
therein) are associated with higher costs of debt. However, they
also find that this relation does not hold for firms classified as “tax
planners” based on having relatively low effective tax rates. Hanlon
et al. (2012) find similar results in the context of audit costs. I perform

Table 5
2-way fixed effects regression results incorporating board and audit committee characteristics.

Dependent variable — AbsBTD Dependent variable — VarBTD

Total Perm Temp Total Perm Temp

Independent
variables
(Predicted sign) Coeff t-stat Coeff t-stat Coeff t-stat Coeff t-stat Coeff t-stat Coeff t-stat

InstOwn (−) −0.00017 −2.17 ## −0.00037 −4.59 ### −0.00006 −0.89 −0.00015 −2.64 ### −0.00035 −5.77 ### −0.00008 −1.80 ##
IndBOD% (−) −0.00113 −0.21 −0.00721 −1.31 # 0.00774 1.62 −0.00896 −2.31 ## −0.00552 −1.37 # −0.00030 −0.09
IndAC% (−) −0.00120 −0.46 0.00089 0.34 −0.00384 −1.69 ## 0.00277 1.44 −0.00206 −1.10 −0.00121 −0.73
BODSize (+) 0.00042 0.77 0.00071 1.40 # 0.00017 0.37 0.00078 2.07 ## 0.01104 2.92 ### 0.00078 2.34 ###
ACSize (−) −0.00067 −0.95 −0.00152 −2.35 ### 0.00040 0.67 0.00010 0.22 −0.00111 −2.34 ### 0.00063 1.55

N 7070 7070 7070 7070 7070 7070

F-stat. 2.96 (p b 0.01) 2.78 (p b 0.01) 2.62 (p b 0.01) 9.41 (p b 0.01) 10.24 (p b 0.01) 10.35 (p b 0.01)
(fixed effects)
R-squared 0.0994 0.1010 0.0697 0.0803 0.0589 0.0348
(overall)

***, **, and * (###, ##, and #) indicate significance based on a two-tailed (one-tailed) test at the 1%, 5% and 10% levels, respectively. The reported t-statistics are based on Huber–
White robust standard errors. The dependent variables are AbsBTD, which is defined as the absolute value of book–tax differences scaled by prior year total assets for firm i in year t,
and VarBTD, which is defined as the standard deviation of book–tax differences scaled by prior year total assets for firm i over the five year period from year t − 4 to year t. (Total),
(Perm), and (Temp) indicate whether AbsBTD and VarBTD are computed based on total, permanent, or temporary book–tax differences, respectively; InstOwn is the mean percentage
of firm i's stock owned by institutional shareholders across all report dates (generally quarterly) for year t in the Thomson–Reuters institutional holdings database; IndBOD% is the
percentage of directors on the board for firm i in year t who are independent; IndAC% is the percentage of directors on the audit committee for firm i in year t who are independent;
BODSize is the number of directors on the board for firm i in year t; ACSize is the number of directors on the audit committee for firm i in year t.
 266
J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269
Table 6
2-way fixed effects regression results incorporating interactive effects of tax planning, earnings management, the Sarbanes–Oxley Act (SOX), and FIN 48.

Dependent variable — AbsBTD Dependent variable — VarBTD

Total Perm Temp Total Perm Temp

Independent variables
(Predicted sign) Coeff t-stat Coeff t-stat Coeff t-stat Coeff t-stat Coeff t-stat Coeff t-stat

Panel A: Tax planning & earnings management

InstOwn (−) −0.00017 −2.22 ## −0.00042 −5.54 ### −0.00006 −0.82 −0.00012 −2.18 ## −0.00033 −5.60 ### −0.00006 −1.24
InstOwn*TaxPlan (?) 0.00004 0.31 0.00024 1.98 ** 0.00006 0.60 −0.00007 −0.86 0.000005 0.05 −0.00009 −1.24
InstOwn*EM (?) −0.00001 −0.08 0.00002 0.23 −0.00004 −0.54 −0.00003 −0.51 −0.00008 −1.42 −0.00002 −0.46

N 7070 7070 7070 7070 7070 7070

F-stat. (fixed effects) 2.75 (p b 0.01) 2.74 (p b 0.01) 2.52 (p b 0.01) 8.92 (p b 0.01) 9.87 (p b 0.01) 9.91 (p b 0.01)
R-squared (overall) 0.1262 0.1091 0.0822 0.1098 0.0741 0.0536

Panel B: SOX and FIN 48

InstOwn (−) −0.00027 −2.77 ### −0.00038 −4.26 ### −0.00002 −0.20 −0.00013 −2.01 ## −0.00027 −3.91 ### −0.00002 −0.41
InstOwn*SOX (?) 0.00005 0.58 −0.000005 −0.06 −0.00015 −2.12 ** −0.00004 −0.78 −0.00012 −1.91 ** −0.00010 −1.93 *
InstOwn*SOX*FIN48 (?) 0.00010 1.07 0.00005 0.55 0.00012 1.52 −0.00001 −0.11 0.00001 0.21 −0.00003 −0.63

N 6406 6406 6406 6406 6406 6406

F-stat. (fixed effects) 2.86 (p b 0.01) 2.62 (p b 0.01) 2.46 (p b 0.01) 8.44 (p b 0.01) 9.53 (p b 0.01) 9.35 (p b 0.01)
R-squared (overall) 0.0833 0.1015 0.0626 0.0861 0.0670 0.0427

***, **, and * (###, ##, and #) indicate significance based on a two-tailed (one-tailed) test at the 1%, 5% and 10% levels, respectively. The reported t-statistics are based on Huber–White robust standard errors. The dependent variables are
AbsBTD, which is defined as the absolute value of book–tax differences scaled by prior year total assets for firm i in year t, and VarBTD, which is defined as the standard deviation of book–tax differences scaled by prior year total assets for firm
i over the five year period from year t − 4 to year t. (Total), (Perm), and (Temp) indicate whether AbsBTD and VarBTD are computed based on total, permanent, or temporary book–tax differences, respectively; InstOwn is the mean percentage
of firm i's stock owned by institutional shareholders across all report dates (generally quarterly) for year t in the Thomson–Reuters institutional holdings database; TaxPlan is an indicator variable coded 1 if the cumulative ratio of cash taxes
paid to pretax income (before special items) over the five year period from year t − 4 to year t for firm i is in the lowest quintile of the sample for year t, 0 otherwise; EM is an indicator variable coded 1 if the absolute value of performance-
matched discretionary accruals (derived from the process described in footnote 14) for firm i in year t is in the highest quintile of the sample for year t, 0 otherwise; SOX is an indicator variable coded 1 if the year is 2003 or later, 0 otherwise;
FIN48 is an indicator variable coded 1 if the year is 2007 or later, 0 otherwise.
 J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269
an additional analysis to examine whether the main results in this
study are similarly attenuated by tax planning. Further, as one might
expect a similar (or opposite) interaction effect with earnings
management, I also examine whether the main results reported in
Table 4 vary with firms' propensities toward high levels of earnings
management.
To perform these analyses, I again re-estimate Eqs. (1) and (2)
adding indicator variables that identify “tax planners” (TaxPlan) and
“earnings managers” (EM) and interactions between each of these
variables and InstOwn. TaxPlan is coded 1 if the cumulative ratio
of cash taxes paid to pretax income (before special items) over the
five year period from year t − 4 to year t for firm i is in the lowest
quintile of the sample for year t, and 0 otherwise. EM is coded 1 if
the absolute value of performance-matched discretionary accruals
for firm i in year t is in the highest quintile of the sample for year t,
and 0 otherwise. 14
The results are reported in Panel A of Table 6. Overall R-squared
values and the results for the control variables (untabulated) continue
to closely resemble those reported in Table 4 for the main models, as
do the results for InstOwn. The interaction term InstOwn* TaxPlan is
significantly positive in the AbsBTD(Perm) model but is not significant
in any other model, suggesting that the association between levels of
permanent BTDs and InstOwn is weaker for high-tax-planning firms
than for other firms. However, a test of the joint significance of InstOwn
and InstOwn* TaxPlan suggests that the association between levels
of permanent BTDs and levels of institutional ownership remains
significant for tax planners, albeit only marginally so (pb 0.10). The
interaction term InstOwn * EM is not significant in any model. Overall,
these results suggest that the inferences drawn from the findings
reported in Table 4 are substantially the same regardless of whether
firms engage in high levels of tax planning or earnings management,
although tax planning does appear to have an attenuating interactive
effect with respect to permanent BTD levels.
4.2.3. Accounting for the Sarbanes–Oxley Act and FIN 48
It is well known that the enactment of the Sarbanes–Oxley Act of 2002
(SOX) significantly changed the financial reporting environment and
generally heightened the focus in the U.S. on corporate governance.15
The implementation of FASB Interpretation No. 48 (FIN 48) also had a
notable impact of the financial reporting environment, albeit specifically
14
I derive performance-matched discretionary accruals following Frank et al. (2009).
The first step is to derive modified Jones-model discretionary accruals (DeChow, Sloan,
& Sweeney, 1995) from the following equation, estimated by industry (two-digit SIC
code) and by year:
TACC it ¼ γ0 þ γ1 ðΔREV it −ΔARit Þ þ γ 2 PPEit þ ηit
where ΔREVit is the change in sales for firm i from year t − 1 to year t; ΔARit is the
change in accounts receivable for firm i from year t − 1 to year t; PPEit is gross property,
plant, and equipment for firm i in year t; ηit is discretionary accruals for firm i in year t
(before performance adjustment), and TACCit is total pretax accruals for firm i in year t,
defined as follows:
TACC it ¼ ðEBEI it þ TTEit Þ−½ðCFOP it þ ITP it Þ−EIDOit 
where EBEIit is earnings before extraordinary items and discontinued operations from
the statement of cash flows for firm i in year t; TTEit is total tax expense for firm i in
year t; CFOPit is cash flows from operating activities for firm i in year t; ITPit is income
taxes paid from the statement of cash flows for firm i in year t; and EIDOit is
extraordinary items and discontinued operations from the statement of cash flows
for firm i in year t. Once discretionary accruals (η) are derived, I match firm-year
observations by decile of ROA within each industry. Performance matched
discretionary accruals are the difference between ηit and the median value of η for
the corresponding ROA decile within the industry (excluding the observation).
15
For example, SOX explicitly set certain mandatory corporate governance standards
for publicly traded firms, including a 100% independence requirement for audit
committees and a requirement that CEOs and CFOs personally certify the accuracy of
the financial statements.
267
in the context of accounting for income taxes. As both have potential
implications for firms' reporting of BTDs and for how those who monitor
firm managers perceive BTDs, I investigate whether the results reported
in Table 4 are dependent on the time frame examined (i.e., pre- vs.
post-SOX and/or pre- vs. post-FIN 48).
I re-estimate Eqs. (1) and (2) once more adding indicator variables
that identify the post-SOX (SOX) and post-FIN 48 (FIN48) time periods.
SOX is coded 1 if the year is 2003 or later, and 0 otherwise. 16 FIN48 is
coded 1 if the year is 2007 or later, and 0 otherwise. I also include two
interaction terms, InstOwn* SOX and InstOwn* SOX * FIN48 to examine
whether the associations between BTDs and level of institutional
ownership differ across the three time periods. Accordingly, InstOwn
represents only the pre-SOX era, InstOwn * SOX captures the change in
the coefficient on InstOwn in the period between the enactment of
SOX and the implementation of FIN 48, and InstOwn* SOX * FIN48
captures any additional change in the coefficient on InstOwn in the
post-FIN 48 time period.
The results are shown in Panel B of Table 6. Overall R-squared values
and the results for the control variables (untabulated) are again
consistent with those reported in Table 4. The results for InstOwn also
continue to match those in Table 4 with the exception that it loses its
significance in the VarBTD(Temp) model. The interaction term
InstOwn* SOX is significantly negative (at least at the 0.10 level) in
both Temp models and in the VarBTD(Perm) model. The interaction
term InstOwn* SOX * FIN48 is not significant in any model. Overall,
these results indicate that the inferences drawn from the findings
reported in Table 4 are generally the same across the entire sample
period; higher levels of institutional ownership are associated with
lower BTDs (in terms of both levels and volatility), and this effect is
driven primarily by the permanent component of BTDs. However, the
results in Table 6 do seem to shed more light on the relation between
institutional ownership and temporary BTDs. Specifically, this asso-
ciation is significant only in the post-SOX era for both AbsBTD and
VarBTD, which explains the weak results for temporary BTDs in Table 4.
To the extent that temporary BTDs are more reflective of aggressive
financial reporting than are permanent BTDs (e.g., Badertscher et al.,
2009; Frank & Rego, 2006; Hanlon, 2005; Phillips et al., 2003, 2004),
this finding is intuitive considering that the heightened focus on
corporate governance (including a perceived need for stronger moni-
toring) in the post-SOX era centered around a reduced tolerance for
uncertainty in financial reporting.
4.3. Sensitivity analysis
I re-perform the analyses reported in Table 4 making (separately) a
number of alterations to the regression models to test the robustness of
my main results. First, although the fixed-effects regression methodology
controls for industry, I examine directly whether the results reported
in Table 4 vary across different industry groups. This is done by adding
to the model interaction terms between InstOwn and five indicator
variables identifying various industry groups (i.e., comparing six industry
groups altogether). The industry groups are “basic industries,” “capital
goods,” “construction,” “consumer goods,” “energy,” and “transpor-
tation” following Amir, Kirschenheiter, and Willard (1997).17 The results
16
I omit observations for the year 2002 (the first effective year of the SOX act) from
this analysis to separate the pre- and post-SOX eras as cleanly as possible. The main
results are unaffected by the omission of these observations.
17
The sets of four-digit SIC codes that make up each of the industry groups are as follows:
1) Basic Industries: 1000–1299, 1400–1499, 2600–2699, 2800–2829, 2870–2899,
3300–3399; 2) Capital Goods: 3400–3419, 3440–3599, 3670–3699, 3800–3849,
5080–5089, 5100–5129, 7300–7399; 3) Construction: 1500–1699, 2400–2499, 3220–3299,
3430–3439, 5160–5219; 4) Consumer Goods: 0000–0999, 2000–2399, 2500–2599,
2700–2799, 2830–2869, 3000–3219, 3420–3429, 3600–3669, 3700–3719, 3850–3879,
3880–3999, 4800–4899, 5000–5079, 5090–5099, 5130–5159, 5220–5999, 7000–7299,
7400–9999; 5) Energy: 1300–1399, 2900–2999; 6) Transportation: 3720–3799, 4000–4799
268 J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269
across the industry groups (untabulated) are consistent with those
reported in Table 4 with a few exceptions. First, the associations between
institutional ownership and BTDs lose their significance in all but the
VarBTD(Temp) model for the “basic industries” group. Second, although
the main results hold for the “energy” group in the VarBTD models, the
coefficient on InstOwn becomes insignificant in the AbsBTD(Total)
model and significantly positive in the AbsBTD(Temp) model. Last,
although the main results hold for the “transportation” group in the
AbsBTD models, the coefficient on InstOwn becomes insignificant in the
VarBTD(Perm) model and significantly positive in the Total and Temp
models for VarBTD. In short, the results are altogether consistent with
those reported in Table 4 for the “capital goods,” “construction,” and
“consumer goods” groups (over 80%of the sample) and are partially
so (i.e., mixed) for the “basic industries,” “energy,” and “transportation”
groups.
A second potential concern relates to firms with foreign operations.
To the extent that firms with foreign operations are inherently more
complex and generate BTDs that are greater in magnitude and/or
more volatile than those of other firms, it is important to verify that
my main findings are not simply a function of firms' foreign operations.
I test for this concern by re-estimating the versions of Eqs. (1) and (2)
reported in Table 4 redefining ForOp as income from foreign operations
for firm i in year t scaled by prior year total assets and then interacting
this variable with InstOwn.18 The results (untablulated) for InstOwn
(representing firms without foreign-source income or loss) are virtually
the same as those reported in Table 4. Further, InstOwn* ForOp is
significant (negative) only in the VarBTD(Total) model, indicating that
the coefficient on InstOwn is more strongly negative in that model for
firms with higher foreign income. These results suggest that my main
findings are not driven by firms with foreign operations.
Finally, a variable representing cash flows is not included in the main
model. Although controlling for cash flows would be appropriate given
prior evidence of an association between them and BTDs (e.g., Frank
et al., 2009), this variable is omitted because operating cash flows are
highly correlated with ROA in my sample to the extent of raising
concerns about harmful collinearity (coefficient exceeds 0.75 on both
diagonals). Nonetheless, I re-estimate the models reported in Table 4
adding CashFlo, defined as operating cash flows for firm i in year t scaled
by prior year total assets, to ensure that the main results are not driven
by the omission of a cash flows variable. The results (untabulated) are
virtually identical to those reported in Table 4, indicating that my
main findings are unaffected by whether the model includes a control
for cash flows.
5. Summary and concluding remarks
This study examines whether levels of institutional ownership
are associated with levels and time-series variability in BTDs. The
study is motivated by the increase in importance of institutional
ownership as a corporate governance mechanism over the last few
decades (e.g., Aghion et al., 2010) and by recent empirical evidence
linking characteristics of BTDs with negative information and economic
outcomes (e.g., Hanlon et al., 2012; Comprix et al., 2011; Ayers et
al., 2010; Dhaliwal et al., 2008). To the extent that BTDs contribute
to information and/or economic outcomes that run counter to the
interests of shareholders, I expect that effective corporate governance
will influence BTDs downward to some extent.
I use a firm fixed-effects regression model and an unbalanced panel
of 7070 firm-year observations covering the period 1998–2009 to test
for associations between the percentage of firm stock owned by
institutions and levels of and time-series variability in BTDs. Overall,
results suggest that, on average, firms with higher levels of institutional
18
The main results are unaffected by redefining ForOp as a continuous variable.
ownership have lower and less volatile BTDs. This effect is driven
primarily by the permanent component of BTDs in the pre-SOX era
but is present for both permanent and temporary BTDs post-SOX.
Further, the negative association between institutional ownership
and BTDs is present regardless of whether firms are classified as “tax
planners” and/or “earnings managers.” I also find some evidence that
stronger monitoring by the board and audit committee (i.e., a smaller
and more independent board and a larger audit committee) is associated
with lower permanent BTDs; however, board and audit committee
characteristics do not appear to have a consistent impact on total or
temporary BTDs.
Overall, the findings in this paper are consistent with higher levels of
institutional ownership equating to more effective monitoring of man-
agement, resulting in lower BTDs (both in terms of levels and time-
series variability). This study contributes to the growing literature on
BTDs and to the literature on the impact of corporate governance
mechanisms on reporting practices by providing evidence consistent
with monitoring effectiveness reducing BTDs, thereby reducing (to
some extent) their apparent uncertainly-related negative consequences.
References
Aboody, D., & Kasznik, R. (2000). CEO stock option awards and the timing of corporate
voluntary disclosures. Journal of Accounting and Economics, 29(1), 73–100.
Aghion, P., Van Reenen, J., & Zingales, L. (2010). Innovation and institutional
ownership. Working Paper: Harvard University, London School of Economics,
University of Chicago.
Agrawal, A., & Mandelker, G. (1992). Shark repellents and the role of institutional
investors in corporate governance. Managerial and Decision Economics, 13(1),
15–22.
Alderfer, C. P. (1986). The invisible director on corporate boards. Harvard Business
Review, 64(6), 38–52.
Amir, E., Kirschenheiter, M., & Willard, K. (1997). The valuation of deferred taxes.
Contemporary Accounting Research, 14(4), 597–622.
Amoah, N., & Tang, A. (2010). Board, audit committee and restatement-induced class
action lawsuits. Advances in Accounting, 26(2), 155–169.
Anderson, R., Mansi, S., & Reeb, D. (2004). Board characteristics, accounting report
integrity, and the cost of debt. Journal of Accounting and Economics, 37(3), 315–342.
Atwood, T. J., Drake, M., & Myers, L. (2010). Book–tax conformity, earnings persistence
and the association between earnings and future cash flows. Journal of Accounting
and Economics, 50(1), 111–125.
Ayers, B., Laplante, S., & McGuire, S. (2010). Credit ratings and taxes: The effect of
book/tax differences on ratings changes. Contemporary Accounting Research, 27(2),
359–402.
Badertscher, B., Phillips, J., Pincus, M., & Rego, S. (2009). Earnings management
strategies and the trade-off between tax benefits and detection risk: To conform
or not to conform. The Accounting Review, 84(1), 63–97.
Beasley, M. (1996). An empirical analysis of the relation between the board of director
composition and financial statement fraud. The Accounting Review, 71(4), 443–465.
Beasley, M., Carcello, J., Hermanson, D., & Lapides, P. (2000). Fraudulent financial
reporting: Consideration of industry traits and corporate governance mechanisms.
Accounting Horizons, 14(4), 441–454.
Blaylock, B., Gaertner, F., & Shevlin, T. (2012). The association between book–tax
conformity and earnings management. Working paper: Oklahoma State University,
Nanyang Technological University, University of Washington.
Brickley, J., Coles, J., & Terry, R. (1994). Outside directors and the adoption of poison
pills. Journal of Financial Economics, 35(3), 371–390.
Brown, D., & Caylor, M. L. (2006). Corporate governance and firm valuation. Journal of
Accounting and Public Policy, 25(4), 409–434.
Bushee, B. (1998). The influence of institutional investors on myopic R&D investment
behavior. The Accounting Review, 73(3), 305–333.
Byrd, J., & Hickman, K. (1992). Do outside directors monitor managers? Evidence from
tender offer bids. Journal of Financial Economics, 32(2), 195–221.
Chen, S., Chen, X., Cheng, Q., & Shevlin, T. (2010). Are family firms more tax aggressive
than non-family firms? Journal of Financial Economics, 95(1), 41–61.
Cheng, Q., & Warfield, T. (2005). Equity incentives and earnings management. The
Accounting Review, 80(2), 441–476.
Chung, R., Firth, M., & Kim, J-B. (2002). Institutional monitoring and opportunistic
earnings management. Journal of Corporate Finance, 8(1), 29–48.
Clay, D. (2002). Institutional ownership and firm value. Working paper: University of
Southern California.
Comprix, J., Graham, R., & Moore, J. (2011). Empirical evidence on the impact of book–
tax differences on divergence of opinion among investors. Journal of American
Taxation Association, 33(1), 51–78.
Cornett, M. M., Marcus, A., & Tehranian, H. (2008). Corporate governance and
pay-for-performance: The impact of earnings management. Journal of Financial
Economics, 87(2), 357–373.
Davidson, W., Jiraporn, P., Kim, Y. S., & Nemec, C. (2004). Earnings management
following duality-creating successions: Ethnostatistics, impression management,
and agency theory. Academy of Management Journal, 47(2), 267–275.
 J.A. Moore / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 254–269
DeChow, P., Sloan, R., & Sweeney, A. (1995). Detecting earnings management. The
Accounting Review, 70(2), 193–226.
DeChow, P., Sloan, R., & Sweeney, A. (1996). Causes and consequences of earnings
manipulation: An analysis of firms subject to enforcement actions by the SEC.
Contemporary Accounting Research, 13(1), 1–36.
Desai, M. (2003). The divergence between book and tax income. In J. Poterba (Ed.), Tax
Policy and the Economy. Cambridge, MA: MIT Press.
Desai, M., & Dharmapala, D. (2006). Corporate tax avoidance and high powered
incentives. Journal of Financial Economics, 79(1), 145–179.
Desai, M., & Dharmapala, D. (2009). Corporate tax avoidance and firm value. The Review
of Economics and Statistics, 91(3), 537–546.
Dhaliwal, D., Huber, R., Lee, H. S., & Pincus, M. (2008). Book–tax differences,
uncertainty about fundamentals and information quality, and cost of capital.
Working Paper: University of Arizona, University of California (Irvine).
Erickson, M., Hanlon, M., & Maydew, E. (2006). Is there a link between executive
equity incentives and accounting fraud? Journal of Accounting Research, 44(1),
113–143.
Fama, E. (1980). Agency problems and the theory of the firm. Journal of Political
Economy, 88(2), 288–307.
Fama, E., & Jensen, M. (1983). Separation of ownership and control. Journal of Law and
Economics, 26(2), 301–325.
Fields, T., Lys, T., & Vincent, L. (2001). Empirical research on accounting choice. Journal
of Accounting and Economics, 31(1–3), 255–307.
Frank, M. M., Lynch, L., & Rego, S. (2009). Tax reporting aggressiveness and its relation
to aggressive financial reporting. The Accounting Review, 84(2), 467–496.
Frank, M. M., & Rego, S. (2006). Do managers use the valuation allowance account to
manage earnings around certain earnings targets? Journal of American Taxation
Association, 28(1), 43–65.
Gillan, S., & Starks, L. (2003). Corporate governance, corporate ownership, and the role
of institutional investors: A global perspective. Journal of Applied Finance, 13(2),
4–22.
Guidry, F., Leone, A. J., & Rock, S. (1999). Earnings-based bonus plans and earnings
management by business-unit managers. Journal of Accounting and Economics,
26(1–3), 113–142.
Hanlon, M. (2005). The persistence and pricing of earnings, accruals, and cash flows
when firms have large book–tax differences. The Accounting Review, 80(1),
137–166.
Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and
Economics, 50(2–3), 127–178.
Hanlon, M., Krishnan, G., & Mills, L. (2012). Audit fees and book–tax differences. Journal
of the American Taxation Association, 34(1), 55–86.
Hanlon, M., Laplante, S., & Shevlin, T. (2005). Evidence for the possible information loss
of conforming book income and taxable income. Journal of Law and Economics,
48(2), 407–442.
Hanlon, M., Maydew, E., & Shevlin, T. (2008). An unintended consequence of book–tax
conformity: A loss of earnings informativeness. Journal of Accounting and
Economics, 46(2–3), 294–311.
Hanlon, M., Mills, L., & Slemrod, J. (2007). An empirical examination of corporate tax
noncompliance. In A. Auerbach, J. R. HinesJr., & J. Slemrod (Eds.), Taxing Corporate
Income in the 21st Century. Cambridge, MA: Cambridge University Press.
Healy, P. (1985). The impact of bonus schemes on accounting decisions. Journal of
Accounting and Economics, 7(1–3), 85–107.
Hermalin, B., & Weisbach, M. (1988). The determinants of board composition. The
RAND Journal of Economics, 19(4), 589–606.
269
Holthausen, R., Larcker, D., & Sloan, R. (1995). Annual bonus schemes and the
manipulation of earnings. Journal of Accounting and Economics, 19(1), 29–74.
Jensen, M. (1993). The modern industrial revolution, exit, and the failure of internal
control systems. Journal of Finance, 48(3), 831–880.
Jensen, M. (2005). Agency costs of overvalued equity. Financial Management, 34(1),
5–19.
Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency
costs, and ownership structure. Journal of Financial Economics, 3(4), 305–360.
Jiang, W., Lee, P., & Anandarajan, A. (2008). The association between corporate
governance and earnings quality: Further evidence using GOV-Score. Advances in
Accounting, 24(2), 191–201.
Khan, R., Dharwadkar, R., & Brandes, P. (2005). Institutional ownership and CEO
compensation: A longitudinal examination. Journal of Business Research, 58(8),
1,078–1,088.
Khurana, I., & Moser, W. (2009). Shareholder investment horizons and tax
aggressiveness. Working paper: University of Missouri.
Kim, J. W. (2009). Do independent directors monitor family firms? Working Paper:
University of Oregon.
Klein, A. (2002a). Audit committee, board of director characteristics, and earnings
management. Journal of Accounting and Economics, 33(3), 375–400.
Klein, A. (2002b). Economic determinants of audit committee independence. The
Accounting Review, 77(2), 435–452.
Lanis, R., & Richardson, G. (2011). The effect of board of director composition on
corporate tax aggressiveness. Journal of Accounting and Public Policy, 30(1), 50–70.
Lev, B., & Nissim, D. (2004). Taxable income, future earnings, and equity values. The
Accounting Review, 79(4), 1,039–1,074.
Manzon, G., & Plesko, G. (2002). The relation between financial and tax reporting
measures of income. Tax Law Review, 55(2), 175–214.
Mills, L. (1998). Book–tax differences and internal revenue service adjustments. Journal
of Accounting Research, 36, 343–356.
Mills, L., & Newberry, K. (2001). The influence of tax and nontax costs on book–tax
reporting differences: Public and private firms. Journal of American Taxation
Association, 23(1), 1–19.
Minnick, K., & Noga, T. (2010). Do corporate governance characteristics influence tax
management? Journal of Corporate Finance, 16(5), 701–718.
Nwaeze, E. (2011). Are incentives for earnings management reflected in the ERC: Large
sample evidence. Advances in Accounting, 27(1), 26–38.
Phillips, J., Pincus, M., & Rego, S. (2003). Earnings management: New evidence based
on deferred tax expense. The Accounting Review, 78(2), 491–521.
Phillips, J., Pincus, M., Rego, S., & Wan, H. (2004). Decomposing changes in deferred tax
assets and liabilities to isolate earnings management activities. Journal of American
Taxation Association, 26, 491–521 [(Sup)].
Rego, S., & Wilson, R. (2008). Executive compensation, tax reporting aggressiveness,
and future firm performance. Working paper: University of Iowa.
Schleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance,
52(2), 737–783.
Weber, D. (2009). Do analysts and investors fully appreciate the implications of book–tax
differences for future earnings? Contemporary Accounting Research, 26(4), 1175–1206.
Weisbach, M. (1988). Outside directors and CEO turnover. Journal of Financial
Economics, 20(1), 431–460.
Wilson, R. (2009). An examination of corporate tax shelter participants. The Accounting
Review, 84(3), 969–999.