Tax Avoidance, Large Positive Book-Tax Differences and Earnings Persistence
Bradley S. Blaylock
Oklahoma State University - Spears School of Business
Terry J. Shevlin
University of California-Irvine
Ryan J. Wilson
University of Oregon - Lundquist College of Business
March 29, 2010
We investigate why book-tax temporary differences appear to serve as a useful signal of earnings persistence. We maintain that there are multiple potential sources of large positive book-tax differences and examine the differing implications of large positive book-tax differences for earnings and accruals persistence depending on the source of those differences. We expect and observe that firms with large positive book-tax differences likely arising from tax avoidance exhibit greater accruals persistence than other firms with large positive book-tax differences. We also expect and observe that firms with large positive book-tax differences likely arising from upward earnings management exhibit lower earnings and accruals persistence than other firms with large positive book-tax differences. Further, we provide evidence that investors are able to look through to the source of large positive book-tax differences allowing them to correctly price the persistence of accruals. Together, our results illustrate the importance of considering the source of book-tax differences when using them as a signal of earnings quality.
Number of Pages in PDF File: 54
Keywords: book-tax differences, earnings persistence, earnings quality, earnings expectations
JEL Classification: M41working papers series
Date posted: December 17, 2009 ; Last revised: April 8, 2010
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