On the Relation of Deferred Taxes and Tax Cash Flow
Astrid K. Chludek
University of Cologne - Cologne Graduate School in Management, Economics and Social Sciences
April 28, 2011
Using panel data over 16 years of observations, this study investigates whether deferred tax information serves its main purpose – informing about future tax cash flow. The results show that deferred taxes in fact have short-term cash flow implications. Yet, the estimated magnitude of these implied cash flows is rather small. While the model explains 86.53 percent of the variation in cash taxes paid, inclusion of deferred tax information adds only negligible 0.14 percent in explanatory power. Furthermore, deferred tax coefficients are insignificant for explaining future tax cash flow for 67.25 percent of the sample firms. Consistently, MAPE, RMSE, and differences in forecast errors suggest that the model excluding deferred tax information outperforms the model including deferred tax information in terms of average forecasting accuracy. Overall, the economic significance of deferred tax cash flow seems to be vary small.
Number of Pages in PDF File: 52
Keywords: Deferred Taxes, Cash Taxes Paid, Tax Cash Flow, CASH ETR, ASC 740, SFAS No.109
JEL Classification: M41
Date posted: March 6, 2011 ; Last revised: June 25, 2011
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