Credit Ratings and Taxes: The Effect of Book/Tax Differences on Ratings Changes

50 Pages Posted: 17 Dec 2008 Last revised: 6 Jan 2012

See all articles by Benjamin C. Ayers

Benjamin C. Ayers

University of Georgia

Stacie Kelley Laplante

University of Wisconsin - Madison

Sean T. McGuire

Texas A&M University - Department of Accounting

Date Written: November 30, 2008

Abstract

This paper examines whether credit analysts utilize the information contained in the difference between book and taxable income in analyzing a firm's credit risk. Increased book-tax differences may be informative for credit rating agencies as they may signal decreased earnings quality or changes in the firm's off-balance sheet financing. Results suggest a significant negative association between positive changes in book-tax differences and ratings changes. This evidence is consistent with large positive changes in book-tax differences signaling decreased earnings quality and/or increased off-balance sheet financing. We also find that large negative changes in book-tax differences result in less favorable rating changes, consistent with these changes signaling decreased earnings quality. In additional analyses, we find that the association between changes in book-tax differences and rating changes is attenuated for high tax planning firms (e.g., where book-tax differences more likely reflect tax planning than decreased earnings quality).

Keywords: Credit ratings, taxable income, book income, tax planning

JEL Classification: G29, H25, H32, M41

Suggested Citation

Ayers, Benjamin C. and Laplante, Stacie Kelley and McGuire, Sean T., Credit Ratings and Taxes: The Effect of Book/Tax Differences on Ratings Changes (November 30, 2008). Contemporary Accounting Research, Vol. 27, No. 2, pp. 43-358. Available at SSRN: https://ssrn.com/abstract=1316564 or http://dx.doi.org/10.2139/ssrn.1316564

Benjamin C. Ayers

University of Georgia ( email )

Athens, GA 30602
United States
706-542-3772 (Phone)
706-542-3630 (Fax)

Stacie Kelley Laplante (Contact Author)

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States
608-265-3494 (Phone)
608-265-3494 (Fax)

Sean T. McGuire

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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