Disclosed Tax Dispute Exposure and Accrual-Based Earnings Management: Evidence from Brazil

Brazilian listed firms report material and persistent tax disputes in a setting that requires recurring judgment about recognition and disclosure and includes an observable premium listing regime. Using 3544 firm-year observations for 254 non-financial firms listed on B3 from 2009 to 2024, we examine whether accrual-based earnings management (AEM), measured as the absolute residual from a pooled Jones-family accrual model augmented with lagged return on assets, is associated with disclosed tax dispute exposure (DTE), measured as recognized tax provisions plus disclosed contingent tax liabilities scaled by total assets, and whether the association differs by Novo Mercado status. The performance control reduces the risk of classifying normal profitability-related accruals as abnormal, while the absolute value captures deviations in either direction; AEM remains a reporting-outcome proxy rather than a direct measure of internal-control effectiveness. In the primary fully interacted specification, the AEM slopes are 0.023 (SE 0.266) among firms outside and 0.093 (SE 0.068) among Novo Mercado firms; their difference is 0.070 (SE 0.274). The 95% confidence interval for the outside-segment slope [−0.498, 0.545] includes estimates from restricted models, indicating limited precision rather than evidence of no association. Sensitivity analyses using winsorized DTE and ln(1 + DTE) yield modest positive slopes in both groups but no precisely estimated group difference; restricting the sample to DTE ≤ 1 yields a positive outside-segment slope but an imprecise difference. Secondary between-firm and quantile models yield negative interactions, whereas the within-firm slope among Novo Mercado firms is positive. These estimator-specific patterns show that the AEM–DTE relation depends on the estimand and model restrictions and do not support a uniform governance-moderation, causal, or out-of-sample predictive interpretation.