Are Book-Tax Differences Mispriced?

53 Pages Posted: 5 May 2018 Last revised: 20 Apr 2020

See all articles by Bradford F. Hepfer

Bradford F. Hepfer

Texas A&M University - Department of Accounting

Date Written: March 2020


I examine whether book-tax differences (BTDs) are mispriced. Using time-series asset pricing tests, I provide evidence of hedge returns to trading on BTDs consistent with prior evidence from security-level return predictability tests. BTDs are a function of accruals and growth, so I consider whether BTD mispricing is accrual and growth mispricing, two economically significant asset pricing anomalies. Using operating cash flows-to-price (CFO/P), which jointly captures accrual and growth mispricing, I provide consistent evidence that the returns to trading on BTDs are subsumed by the returns to trading on CFO/P. My findings suggest that BTD mispricing is the accrual and growth anomalies in disguise, rather than a distinct anomaly. Overall, the evidence casts doubt on the ability of BTDs to provide unique, unpriced information for future earnings and their usefulness as a mispricing signal. This study provides useful evidence to investors and informs calls for additional tax-related disclosures.

Keywords: book-tax differences; operating cash flows-to-price; mispricing; accrual anomaly; growth anomaly

JEL Classification: G12, G14, M41

Suggested Citation

Hepfer, Bradford F., Are Book-Tax Differences Mispriced? (March 2020). Mays Business School Research Paper No. 3165163, Available at SSRN: or

Bradford F. Hepfer (Contact Author)

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

430 Wehner
College Station, TX 77843-4353
United States

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