Earnings persistence and stock market reactions to the different information in book-tax differences : evidence from China
Document Type
Journal article
Source Publication
The International Journal of Accounting
Publication Date
1-1-2012
Volume
47
Issue
3
First Page
369
Last Page
397
Keywords
Book-tax differences, Earnings and tax management, Earnings persistence, Earnings quality, Stock returns
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.
DOI
10.1016/j.intacc.2012.07.004
Print ISSN
10944060
E-ISSN
22133933
Publisher Statement
Copyright © 2012 University of Illinois
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Tang, T. Y. H., & Firth, M. (2012). Earnings persistence and stock market reactions to the different information in book-tax differences: Evidence from China. International Journal of Accounting, 47(3), 369-397. doi: 10.1016/j.intacc.2012.07.004