Conforming tax avoidance and earnings persistence

Purpose: This study aims to test the effect of conforming tax avoidance on earnings persistence. Design/methodology/approach: The authors use multiple linear regression incorporating firm and year-fixed effects to examine the association between conforming tax avoidance and earnings persistence. Additionally, the authors explore the moderating effect of conforming tax avoidance on the association between current earnings and future (one-year) operating cash flow (OCF). To guarantee the strength and reliability of the results, the authors perform several additional tests. Findings: The empirical findings reveal a statistically significantly negative association between conforming tax avoidance and earnings persistence. Additionally, the authors observe that conforming tax avoidance significantly and negatively moderates the relationship between current earnings and future OCF. Furthermore, the principal regression outcomes exhibit resilience in a range of robustness checks. Originality/value: This research contributes to the accounting literature by offering a novel perspective on understanding one of the potential reasons behind firms exhibiting low earnings quality or persistence. Specifically, the authors attribute this phenomenon to the downward impact of conforming tax management. Furthermore, the results propose that the tax authority should be vigilant toward companies exhibiting low earnings persistence, particularly quasi-private firms and those with low financial constraints, as they may have implemented or be motivated to engage in conforming tax strategies that preceded the observed reduction in earnings persistence.