Financial and tax alignment in cross-country accounting research

The link between financial and tax accounts was argued to impede earnings informativeness in Continental-European countries. While European companies are required to prepare group and single accounts, previous research did not distinguish between them. We show that this distinction is important, as book-tax conformity extends only to single accounts and is not binding for group accounts. Therefore cross-country differences in group earnings properties should not be affected by book-tax provisions. We argue that studies documenting this link suffer either from an omitted variable problem (i.e. failure to sufficiently control for differences in reporting incentives) and/or sample selection bias (inclusion/non-inclusion of single accounts in the test sample). We assess cross-country differences in asymmetric earnings timeliness and provide results consistent with both explanations. Furthermore, while the effect of book-tax conformity does not extend to group accounts, the influence of non-tax reporting incentives play an economically significant role in the preparation of "tax-dominated" single accounts. Altogether, our results provide further support for importance of reporting incentives, and show that this effect is stronger than documented in previous research.