Tax and Conservatism in Financial Reporting, and the Value Relevance of Accounting Data

This study investigates whether taxes affect conservatism in financial reporting and the relevance of the resulting financial accounting data for valuation purposes or not. Research method is cross-sectional regression. Sample consists of 123 firms in Tehran Stock Exchange (TSE) and sample spans the period 2005 – 2009. To test H1, H2 used two adjusted equation based on Terry J. Shevlin. Results indicate that firms with large positive difference between cash flows from operations and taxable income are the most conservative but firms with large negative difference between cash flows from operations and taxable income are not less conservative. In addition, I examine whether the value relevance of financial accounting information is impaired for firms that are influenced by taxation. The evidence in my value relevance tests is generally consistent with the value relevance in financial reporting information not necessarily being decreased when tax rules influence financial reporting incentives rather being increased.