Tax Avoidance, Large Positive Temporary Book-Tax Differences, and Earnings Persistence
Blaylock, Bradley, Shevlin, Terry, Wilson, Ryan J.
The Accounting Review · 2012 · Volume 87 · Issue 1
Abstract
We investigate why temporary book-tax differences appear to serve as a useful signal of earnings persistence (Hanlon 2005). We first test and show that temporary book-tax differences provide incremental information over the magnitude of accruals for the persistence of earnings and accruals. We then opine that there are multiple potential sources of large positive book-tax differences. We predict and find that firms with large positive book-tax differences likely arising from upward earnings management (tax avoidance) exhibit lower (higher) earnings and accruals persistence than do other firms with large positive book-tax differences. Finally, we find significant variation in current-period earnings and accruals response coefficients and insignificant hedge returns in periodt+1, consistent with investors being able to look through to the source of large positive book-tax differences (earnings management and tax avoidance), allowing them to correctly price the persistence of accruals for these subsamples. Data Availability:Data are available from public sources identified in the study.
Keywords
book-tax differences, earnings persistence, tax avoidance, earnings management, earnings expectations
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