A Re-Examination of the Book-Tax Difference Pricing Anomaly

60 Pages Posted: 5 May 2018

See all articles by Bradford F. Hepfer

Bradford F. Hepfer

Texas A&M University - Department of Accounting

Date Written: April 2018


This study re-examines the mispricing of book-tax differences (BTDs). I provide evidence using multifactor time-series asset pricing tests that investors can generate abnormal returns trading on temporary BTDs, consistent with prior evidence. However, the abnormal returns to a BTD trading strategy are subsumed by the cash flow-to-price (CFO/P) anomaly. Specifically, hedge-control portfolio tests indicate that trading on BTDs does not yield incremental returns relative to trading on CFO/P, whereas trading on CFO/P does generate incremental returns to trading on BTDs. Viewing the pricing of BTDs in isolation, prior research concludes that BTDs contain information for future earnings, accruals, and cash flows that is not fully reflected in stock prices. My results suggest these findings omit an important correlated variable, CFO/P, which jointly captures accrual and value-glamour mispricing. Overall, my evidence casts doubt on the usefulness of BTDs as a mispricing signal, suggests that the BTD pricing anomaly is a subset of the broader CFO/P anomaly, and tempers calls in the literature for added mandatory tax disclosures and book-to-taxable income reconciliations.

Keywords: book-tax differences, cash flow-to-price mispricing, accrual anomaly, value-glamour anomaly

JEL Classification: G12, G14, M41

Suggested Citation

Hepfer, Bradford F., A Re-Examination of the Book-Tax Difference Pricing Anomaly (April 2018). Mays Business School Research Paper No. 3165163. Available at SSRN: https://ssrn.com/abstract=3165163 or http://dx.doi.org/10.2139/ssrn.3165163

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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