Earnings persistence and stock market reactions to the different information in book-tax differences : evidence from China

T. Y. H. TANG, Michael Arthur FIRTH

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

14 Citations (Scopus)

Abstract

Prior studies document that book-tax differences (BTDs) reflect divergent reporting rules for book and tax purposes, and contain information about earnings management and tax planning. In this paper, we investigate whether the regulatory and opportunistic information impounded in BTDs differentially influences earnings persistence and the earnings-returns relation. Using BTD data from China, we separate BTDs into normal BTDs (NBTDs) and abnormal BTDs (ABTDs). NBTDs are more likely driven by regulatory differences between accounting and tax rules and ABTDs are more likely driven by earnings and tax management activities. We find that firms with large positive and negative ABTDs (NBTDs) exhibit less earnings persistence compared to firms with small ABTDs (NBTDs). However, the level of earnings persistence for large unsigned ABTD firms is significantly lower than it is for large unsigned NBTD firms. While large unsigned NBTDs appear to enhance the earnings-returns relation, we find no evidence that large unsigned ABTDs affect the earnings-returns relation. Overall, the results suggest that the differing components of BTDs have differential implications for earnings quality. Additional tests show that ABTDs and NBTDs can provide incremental information about earnings persistence beyond the information in discretionary accruals and total accruals, suggesting that the investigation of BTDs adds value to financial analysis.
Original languageEnglish
Pages (from-to)369-397
Number of pages29
JournalThe International Journal of Accounting
Volume47
Issue number3
DOIs
Publication statusPublished - 1 Jan 2012

Fingerprint

Earnings persistence
China
Book-tax differences
Stock market reaction
Tax
Earnings-return relation
Management activities
Financial analysis
Earnings quality
Discretionary accruals
Accruals
Tax planning
Incremental
Earnings management

Keywords

  • Book-tax differences
  • Earnings and tax management
  • Earnings persistence
  • Earnings quality
  • Stock returns

Cite this

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title = "Earnings persistence and stock market reactions to the different information in book-tax differences : evidence from China",
abstract = "Prior studies document that book-tax differences (BTDs) reflect divergent reporting rules for book and tax purposes, and contain information about earnings management and tax planning. In this paper, we investigate whether the regulatory and opportunistic information impounded in BTDs differentially influences earnings persistence and the earnings-returns relation. Using BTD data from China, we separate BTDs into normal BTDs (NBTDs) and abnormal BTDs (ABTDs). NBTDs are more likely driven by regulatory differences between accounting and tax rules and ABTDs are more likely driven by earnings and tax management activities. We find that firms with large positive and negative ABTDs (NBTDs) exhibit less earnings persistence compared to firms with small ABTDs (NBTDs). However, the level of earnings persistence for large unsigned ABTD firms is significantly lower than it is for large unsigned NBTD firms. While large unsigned NBTDs appear to enhance the earnings-returns relation, we find no evidence that large unsigned ABTDs affect the earnings-returns relation. Overall, the results suggest that the differing components of BTDs have differential implications for earnings quality. Additional tests show that ABTDs and NBTDs can provide incremental information about earnings persistence beyond the information in discretionary accruals and total accruals, suggesting that the investigation of BTDs adds value to financial analysis.",
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Earnings persistence and stock market reactions to the different information in book-tax differences : evidence from China. / TANG, T. Y. H.; FIRTH, Michael Arthur.

In: The International Journal of Accounting, Vol. 47, No. 3, 01.01.2012, p. 369-397.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

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