Book-Tax Differences and Earnings Growth

Abstract:     
Prior studies suggest that large book-tax differences (BTDs) are related to earnings growth (or persistence), but it is not clear what drives this relation. I divide total BTDs into temporary and permanent categories, and hypothesize that temporary BTDs (reflected in deferred taxes) are related to future changes in pretax earnings, whereas permanent BTDs are related to future changes in tax expense. Results are consistent with these hypotheses. Prior studies also suggest that both types of BTDs are related to earnings management. I investigate whether the effect of earnings management on the BTD/earnings relation is different for the two types of BTDs. I find little evidence that earnings management influences the BTD/earnings relation for either type of BTD.

Number of Pages in PDF File: 45

Keywords: book-tax differences, earnings quality, earnings management, taxable income, deferred taxes

JEL Classification: H25, H32, M41

working papers series