Book-Tax Differences as an Indicator of Financial Distress
Forthcoming in Accounting Horizons
Posted: 10 Oct 2012 Last revised: 7 Feb 2013
Date Written: October 10, 2012
We contend that information not yet considered by the extant research can significantly contribute to bankruptcy prediction, and investigate a possible association between abnormal changes in book-tax differences (BTDs) and bankruptcy. Using a hazard model and out of sample testing as in Shumway (2001), we find that information regarding abnormal changes in BTDs significantly increase our ability to ex-ante identify firms which may have an increased likelihood for going bankrupt in the coming five year period. The information provided by BTDs significantly adds to traditional models for predicting bankruptcy, such as that proposed by Ohlson(1980). We also provide evidence that tax planning behavior may provide a signal about the potential for bankruptcy to outside stakeholders. The findings of this study suggest that further investigation of how tax information currently provided in financial statements can assist in bankruptcy prediction is warranted.
Keywords: Book-Tax Differences, Financial Distress, Bankruptcy, Ohlson Bankruptcy Model
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