54 Pages Posted: 17 Dec 2009 Last revised: 18 Mar 2014
Date Written: 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.
Keywords: book-tax differences, earnings persistence, earnings quality, earnings expectations
JEL Classification: M41
Suggested Citation: Suggested Citation
Blaylock, Bradley S. and Shevlin, Terry J. and Wilson, Ryan J., Tax Avoidance, Large Positive Book-Tax Differences and Earnings Persistence (March 29, 2010). Available at SSRN: https://ssrn.com/abstract=1524298 or http://dx.doi.org/10.2139/ssrn.1524298