Book-Tax Differences and Earnings Growth

Abstract

I examine the relation between book-tax differences (BTDs) and earnings growth.Because financial accounting rules afford managers more flexibility and discretion in repOliing than tax accounting rules, prior studies suggest that large differences between book and taxable income indicate lower quality (or less persistent) earnings. Lev and Nissim and Hanlon provide evidence that BTDs contain infonnation about future finn performance, but the nature of the causality in this relation is not clear. While BTDs could proxy for earnings quality, they may also reveal underlying economic events or management's private information about future perfonnance or simply predict future reversals in effective tax rates.I divide total BTDs into their measurable components: temporary (defelTed taxes) and non-temporary (pennanent differences and tax accruals), and test their relation with the components of net income changes: pretax earnings changes and tax expense changes. I hypothesize that the non-temporary component ofBTDs is negatively related IV to future changes in tax expense, whereas the temporary component ofBTDs is negatively related to changes in future pretax eall1ings. I also examine the maintained hypothesis that the lower earnings growth for large BTD finTIs is due to earnings management. I use various proxies from prior literature to identify fin11s potentially managing earnings and test whether the presence or absence of suspected earnings management activity alters the relation between BTDs and earnings changes.My results provide compelling evidence that pell11anent BTDs are related only to future changes in tax expense, and temporary BTDs are related to changes in pretax eall1ings. These results are robust to multiple sensitivity analyses, including a replication of the sample and methodology of Lev and Nissim. The results also hold in the case of fill11s not suspected of eall1ings management. In fact, I find only limited evidence that the results are stronger in the presence of earnings management. Overall, my study suggests that it is only the temporary component of BTDs that is related to future firm performance, with non-temporary differences being related to future tax expense changes, and that these results are primarily due to underlying economic factors, not eall1ings management.CURRICULUM VITAE

Book-tax Differences dan Pertumbuhan Laba Pada Perusahaan Manufaktur Tahun 2011 - 2016

“…Wijayanti (2006) menggunakan deffered taxes sebagai proksi book-tax differences dan menunjukkan bahwa perusahaan dengan book-tax differences dalam jumlah besar serta bernilai positif dan negatif (PBTD dan NBTD) mempunyai laba yang kurang persisten. Beda permanen menurut hasil penelitian Jackson (2009) berpengaruh positif terhadap pertumbuhan laba, sedangkan untuk perbedaan temporer memiliki hubungan negatif terhadap pertumbuhan laba. Pendapat ini didukung dengan penelitian yang dilakukan oleh Saputro (2011) yang menjelaskan bahwa total book tax difference mampu memprediksi pertumbuhan laba satu periode ke depan.…”

“…Permanent Differences. Menurut Jackson (2009), "Permanent differences are transactions recognized for financial or tax purposes, but not both." Dari definisi itu dapat diketahui bahwa beda permanen timbul karena transaksitransaksi keuangan diakui untuk tujuan komersial bukan untuk tujuan pajak, atau sebaliknya.…”

Normal, Abnormal Book-Tax Differences and Accounting Conservatism

“…These are caused by the differences between the fiscal rules' objectives and those of the accounting rules. Jackson (2009) found that large permanent differences help reduce future net income as they relate to higher future tax expenses. The author adds that temporary BTDs are negatively associated with earnings quality.…”

The Effect of Tax Differences Book on Income Growth (Empirical Study of Manufacturing Companies Listed on the Indonesia Stock Exchange in 2014–2018)

“…The information was obtained not only due to earnings management practices conducted by companies, but because of differences in applications between accounting provisions based on Financial Accounting Standards with fiscal provisions based on Taxation. This is proven by research that the relationship between book tax differences and earnings growth is not always caused by earnings management, but also due to the treatment of different economic transactions and fluctuating effective tax rates [2].…”