Book-Tax Differences and Earnings Growth
University of Nevada, Reno - Department of Accounting and Information Systems
December 28, 2011
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, M41working papers series
Date posted: May 28, 2009 ; Last revised: December 31, 2011
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