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Book-Tax Differences and Earnings Changes

Mark Jackson

University of Nevada, Reno - Department of Accounting and Information Systems

August 25, 2014

Prior studies suggest that large book-tax differences (BTDs) are associated with earnings changes (or persistence), but it is not clear what drives this association. Studies such as Lev and Nissim (2004) examine the association between total BTDs and after-tax earnings changes, but a better understanding of this association requires an examination of the components of the BTDs and earnings changes. I divide total BTDs into temporary and permanent categories, and hypothesize that temporary BTDs (reflected in deferred taxes) predict future changes in pretax earnings, whereas permanent BTDs predict future changes in tax expense. The results are consistent with these hypotheses. Prior studies also suggest that both types of BTDs are associated with earnings management and tax avoidance. I find evidence that tax avoidance firms have a more positive association between their BTDs and both pretax earnings changes and tax expense changes. However, I find only inconsistent evidence on the influence of earnings management on the BTD/earnings changes association, with results dependent on the research design.

Number of Pages in PDF File: 35

Keywords: Book-tax differences, earnings changes, earnings management, tax avoidance, deferred taxes, tax accruals

JEL Classification: H25, H32, M41

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Date posted: May 28, 2009 ; Last revised: August 26, 2014

Suggested Citation

Jackson, Mark, Book-Tax Differences and Earnings Changes (August 25, 2014). Available at SSRN: http://ssrn.com/abstract=1410790 or http://dx.doi.org/10.2139/ssrn.1410790

Contact Information

Mark Jackson (Contact Author)
University of Nevada, Reno - Department of Accounting and Information Systems ( email )
United States
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References:  28
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