Abstract

http://ssrn.com/abstract=1127956
 
 

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Book-Tax Differences, Uncertainty about Fundamentals and Information Quality, and Cost of Capital


Dan S. Dhaliwal


University of Arizona - Department of Accounting

Robert E. Huber


University of Arizona - Department of Accounting

Hye Seung "Grace" Lee


Lehigh University - Department of Accounting

Morton Pincus


University of California, Irvine

November 11, 2008


Abstract:     
Prior research suggests that differences between book and taxable incomes reflect firms' underlying economic fundamentals and their earnings management activities. We investigate the extent to which book-tax differences (BTDs) explain differences in cost of equity capital across firms. Our analysis spans the 1982-2006 period. The results indicate that variability in BTDs estimated over five or six years is positively and significantly related to cost of equity capital (estimated in various ways), whereas other BTD variables generally are not. These findings are consistent with variability in BTDs over time capturing information regarding uncertainty about firms' economic fundamentals and uncertainty about the quality of their earnings. If we assume that only a relatively short time-series of data is available, then we find that the absolute value of BTDs is positive and significantly related to cost of capital.

Number of Pages in PDF File: 53

Keywords: Variability of book-tax differences, innate characteristics, information uncertainty

JEL Classification: M41, M43, H25, G12

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Date posted: July 16, 2008 ; Last revised: August 29, 2014

Suggested Citation

Dhaliwal, Dan S. and Huber, Robert E. and Lee, Hye Seung "Grace" and Pincus, Morton, Book-Tax Differences, Uncertainty about Fundamentals and Information Quality, and Cost of Capital (November 11, 2008). Available at SSRN: http://ssrn.com/abstract=1127956 or http://dx.doi.org/10.2139/ssrn.1127956

Contact Information

Dan S. Dhaliwal (Contact Author)
University of Arizona - Department of Accounting ( email )
McClelland Hall
PO Box 210108
Tucson, AZ 85721
United States
Robert E. Huber
University of Arizona - Department of Accounting ( email )
Tucson, AZ 85721
United States
Hye Seung Lee
Lehigh University - Department of Accounting ( email )
United States
Morton P.K. Pincus
University of California, Irvine ( email )
Irvine, CA 92697-3125
United States
949-824-4062 (Phone)
949-725-2812 (Fax)
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