Int Tax Public Finance (2011) 18:461–494 DOI 10.1007/s10797-011-9176-x Financial reporting, tax, and real decisions: toward a unifying framework Douglas A. Shackelford · Joel Slemrod · James M. Sallee Published online: 6 May 2011 © Springer Science+Business Media, LLC 2011 Abstract This paper provides a first step toward joint evaluation of taxation and fi- nancial reporting in the standard economic analyses of corporate behavior. It develops a framework that formalizes the idea that the attractiveness of some investment deci- sions is enhanced because they provide managers with discretion over the timing of taxable income and/or book income. It then examines from this perspective several current examples of tax and accounting issues. Keywords Taxation · Accounting · Corporate behavior · Discretion JEL Classification H25 · N41 1 Introduction Contrary to the standard assumption of economic analysis, public corporations care not only about the expected present value of their after-tax cash flows, but also about how the transactions that give rise to these cash flows are depicted in their financial accounts (using either accrual or cash flow accounting methods). 1 In this paper, we provide a framework that unifies financial reporting, tax, and real choices by introduc- ing financial reporting considerations into a standard economics model of optimal, 1 We discuss the evidence supporting this claim below. D.A. Shackelford University of North Carolina, Chapel Hill, NC, USA J. Slemrod ( ) University of Michigan, Ann Arbor, MI, USA e-mail: jslemrod@umich.edu J.M. Sallee University of Chicago, Chicago, IL, USA