Book-Tax Differences as an Indicator of Financial Distress

Forthcoming in Accounting Horizons

Posted: 10 Oct 2012 Last revised: 7 Feb 2013

See all articles by Tracy Noga

Tracy Noga

Bentley University

Anne L. Schnader

Suffolk University - Department of Accounting

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

Suggested Citation

Noga, Tracy and Schnader, Anne L., Book-Tax Differences as an Indicator of Financial Distress (October 10, 2012). Forthcoming in Accounting Horizons, Available at SSRN: or

Tracy Noga

Bentley University ( email )

175 Forest Street
Waltham, MA 02145
United States

Anne L. Schnader (Contact Author)

Suffolk University - Department of Accounting ( email )

Sawyer School of Management
Boston, MA 02108
United States

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