Abstract
There is an ongoing debate in the accounting literature about book-tax conformity (BTC) and its impacts on accounting quality. However, only a few studies have investigated the effects of a switch from a system wherein taxable income and accounting earnings are disconnected (Two-Book) to a system where the two income measures are strictly related (One-Book). This study aims at evaluating the impact on accounting quality of an increase in BTC, caused by a change in tax rules toward an IFRS-oriented taxation with the adoption of the so-called “enhanced derivation principle”. The analysis involves a sample of unconsolidated financial statements of Italian listed companies in the years 2006 to 2010. Results show that an increase in BTC under the same set of accounting standards leads to a reduction in earnings persistence. Additionally, earnings management analysis reveals limited signals of a downward trend in abnormal pre-tax working capital accruals after the switch, as a consequence of stronger tax incentives to earnings deflation.