This study resolves divergent prior findings relating book-tax differences to future earnings, determines whether prior literature has missed relationships between different types of book-tax differences and pre-tax and/or after-tax income, and investigates prior earnings as a factor contributing to the observed relationships. As past research has found that some firms have large book-tax differences over several years, this study separates these firms with large stable book-tax differences from others with large book-tax differences (non-stable) when investigating the link between large book-tax differences and future earnings. Finally, this study investigates whether the relationship between book-tax differences and future earnings reflects information about prior earnings and finds that prior earnings growth explains much of the lower persistence found for firms with large book-tax differences.

Despite countless efforts to elucidate market participants" understanding of the implications of earnings quality, empirical accounting research has rendered two distinct perspectives. The first perspective considers market participants naïve users of accounting information who fail to grasp the implications of earnings quality resulting in temporary security mispricing. The second perspective suggests that market participants scrutinize earnings reports carefully and subsequently discern and price the quality of earnings. The purpose of my research is to help clarify the ambiguity surrounding market participants" pricing of earnings quality using one clearly observable indicator of low-quality earnings, accounting restatements. This study examines the effect pre-restatement earnings quality has on short-window returns and analyst forecast revisions and dispersion following restatement announcements using a cross-section of 719 publicly traded firms that announced restatements between 1997 and 2004. Accrual and book-tax difference metrics are used to proxy for earnings quality. The metrics are examined separately and collectively to ascertain their individual and incremental effects in modeling the market reaction. Further analyses investigate the effects that various levels of investor sophistication have on the market reaction. Results indicate that the market reaction to restatement announcements is significantly influenced by pre-restatement earnings quality. Specifically, both the accrual and book-tax difference measures of earnings quality are significantly and negatively related to the market reaction. Further analysis indicates the predictive power of the model is improved by including both the accrual and book-tax difference proxies. This finding suggests the information in book-tax differences may provide market participants with signals from which to assess earnings quality that are distinct from those contained in accruals. Basic results for analyst forecast dispersion and revisions are not conclusive. Results of the interactions between each earnings quality proxy and level of investor sophistication are significant only for the accrual based measure of earnings quality. This suggests that sophisticated investors are more attuned to the implication of accrual based measures of earnings quality than book-tax difference measures. / Ph. D.

abstract: Existing literature consistently documents a relationship between book-tax differences and future financial performance. Specifically, large book-tax differences are associated with lower earnings persistence. I contend that one reason the tax information contained in financial statements is informative about future earnings is that the relationship between book income and taxable income captures information about a firm's life cycle stage. Using a life cycle measure from the literature, I use fundamental analysis to group firm-year observations into life cycle stages and document a link between book-tax differences and firm life cycle. I build on prior studies that find a relation between earnings persistence and book-tax differences, and earnings persistence and firm life cycle. I find that after controlling for firm life cycle stage, the association between large positive book-tax differences and lower earnings persistence does not hold. My results offer an economic theory based explanation for the relation between book-tax differences and earnings persistence as an alternative explanation to findings in prior research. / Dissertation/Thesis / Ph.D. Accountancy 2012

The role of analysts in corporate governance has been examined extensively in the accounting literature. Two conflicting representations of the influence of analysts have emerged. Analysts are either viewed as external monitors of corporate behavior, thereby reducing agency costs; or they are viewed as exerting additional pressure on management to meet earnings forecasts, which may contribute to aggressive corporate behavior. Studies exist that examine the impact of analyst coverage in a financial reporting context. The purpose of this study is to examine the role of analysts in the corporate tax reporting context. This dissertation examines the impact of analyst coverage on corporate tax aggressiveness using a cross-section of publicly traded firms between 1992 and 2006. Permanent discretionary book-tax differences are used to proxy for tax aggressiveness. The relation is examined using ordinary least squares regression as well as two-stage least squares regression using expected coverage and inclusion in the S&P 500 index as instrumented variables to account for the endogeneity of analyst coverage selections. Additional analyses investigate the impact of analyst characteristics: experience as an analyst, experience covering a specific firm and identification as a top analyst. Results indicate that analyst coverage is associated with lower levels of tax aggressiveness. This finding suggests that analysts serve as external monitors of corporate tax behavior. In addition, more experienced analysts are associated with lower levels of tax aggressiveness indicating an improvement in monitoring ability with experience. Analysts identified as All-American analysts by Institutional Investor magazine are associated with higher levels of tax aggressiveness. This result suggests that top analysts may view aggressive tax behavior as a wealth creation tool for firms. / Ph. D.

In this study, I investigate the effect of auditor-provided tax services (ATS) on firms’ levels of book-tax differences and investors’ mispricing of book-tax differences. The joint provision of audit and tax services has been a controversial issue among regulators and academic researchers. Evidence on whether ATS improve or impair the overall accounting quality is inconclusive as a result of the specific testing circumstances involved in different studies. Book-tax differences capture managers’ earnings management and/or tax avoidance intended to maximize reported financial income and to minimize tax expense. Therefore, my first research question investigates whether ATS improve or impair audit quality by examining the relation between ATS and firms’ levels of book-tax differences. My results show that ATS are negatively related to book-tax differences, suggesting that ATS improve the overall audit quality and reduce aggressive financial and/or tax reporting. My second research question examines whether the improved earnings quality for firms acquiring ATS leads to reduced mispricing of book-tax differences among investors. Recent studies document that despite the rich information about firms’ future earnings contained in book-tax differences, investors process such information inefficiently, leading to systematic pricing errors among firms with large book-tax differences. My empirical evidence indicates that ATS mitigate such mispricing, with pricing errors being lower among firms acquiring ATS compared with firms without ATS. Collectively, these results support the notion that ATS improve audit quality through knowledge spillover. Moreover, the improved earnings quality among firms acquiring ATS in turn helps reduce investors’ mispricing of book-tax differences.

Using confidential corporate income tax return data, this paper investigates the association between book-tax non-conformity (measured as book-tax differences) and tax-loss carryforwards (TLCFs). I find that TLCFs are positively associated with temporary and permanent book-tax differences. Only firms with positive pre-tax book income and negative taxable income (double-picture firms) drive the positive association between TLCFs and temporary book-tax differences. Conversely, the positive association of TLCFs and permanent book-tax differences is present for double-picture firms and the remaining firms. The results suggest that double-picture firms, which feature high TLCFs compared to their size and to the remaining firms, use temporary book-tax differences to report a lower taxable income than pre-tax book income. Thus, this paper contributes to the understanding of the drivers of rising TLCFs. This is important, as offsetting TLCFs against future profits jeopardizes a country's tax revenue. (author's abstract) / Series: WU International Taxation Research Paper Series

In this study, I examine whether the pricing of book-tax differences reflects mispricing or a priced risk factor. I provide new evidence that temporary book-tax differences are mispriced by developing portfolios that trade on the information in book-tax differences for future accruals and cash flows. I develop and test predictions on whether book-tax difference mispricing is the value-glamour anomaly in disguise. Both signals of mispricing relate to firm growth and, thus, both may capture mispricing due to over-extrapolation of realized growth to future growth. I find that the book-tax difference pricing anomaly is subsumed by the value-glamour anomaly. Specifically, trading on the information in book-tax differences does not yield incremental returns relative to a value-glamour trading strategy. Hence, mispricing associated with book-tax differences relates more generally to the mispricing of expected growth as extrapolated from past growth.

x, 65 p. : ill. A print copy of this thesis is available through the UO Libraries. Search the library catalog for the location and call number. / I examine the relation between book-tax differences (BTDs) and earnings growth. Because financial accounting rules afford managers more flexibility and discretion in reporting 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 information about future firm 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 performance or simply predict future reversals in effective tax rates. I divide total BTDs into their measurable components: temporary (deferred taxes) and non-temporary (permanent 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 of BTDs is negatively related to future changes in tax expense, whereas the temporary component of BTDs is negatively related to changes in future pretax earnings. I also examine the maintained hypothesis that the lower earnings growth for large BTD firms is due to earnings management. I use various proxies from prior literature to identify firms 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 permanent BTDs are related only to future changes in tax expense, and temporary BTDs are related to changes in pretax earnings. 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 firms not suspected of earnings management. In fact, 1 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 earnings management. / Committee in charge: David Guenther, Chairperson, Accounting; Steven Matsunaga, Member, Accounting; Linda Krull, Member, Accounting; Glen Waddell, Outside Member, Economics

In this research, I present the analysis of the relationship between credit rating and tax avoidance. I found out that the lower the cash effective tax rate the stronger the association with credit rating. Sensitivity analysis showed that the probability of falling into more favorable credit rating category is increases and the probability of falling into less favorable category decreases if cash effective tax rate increases at least by 1%. Also, the negative association between book-tax differences and credit rating found.

Essa pesquisa possui como objetivo verificar se as diferenças existentes entre os lucros contábil e tributável (BTD) conseguem captar o oportunismo por parte dos gestores (GR) existente nas empresas brasileiras de capital aberto, quando isolada a parcela gerada normalmente pela diferença entre as normas (diferenças de método NBTD), no período de 1999 a 2007. Para testar a questão supracitada, foram utilizados modelos econométricos que isolam o oportunismo, comportamento que altera os lucros empresariais. Para a verificação da presença de gerenciamento de resultados utilizou-se os resultados obtidos pelo modelo proposto por Paulo (2007) (modelo BR), o qual apresentou resultados mais adequados ao Brasil. Para isolar o oportunismo por meio da formação das BTD, foi escolhido o modelo empírico de Tang (2006), o qual é baseado no modelo conceitual da mesma autora e envolve tanto variáveis ligadas ao GR quanto ao planejamento tributário (PT) em sua criação. A literatura internacional aponta que a introdução de variáveis que representam o PT em modelos de GR diminui a parcela de erro de estimação desses modelos, auxiliando na identificação do comportamento oportunista. Embora no Brasil os estudos tenham identificado a presença de GR nas demonstrações das empresas, não é comum a realização de estudos envolvendo o lucro tributável, exceto por aqueles que utilizam contas específicas para a identificação de GR (Ex.: Impostos diferidos). Adicionalmente, este trabalho propõe um modelo de separação das parcelas das BTD por meio de variáveis que explicam a formação da BTD no contexto das normas nacionais, com resultados estatísticos mais relevantes para o contexto brasileiro (BTD_BR) do que o criado por Tang (2006). Os resultados desta pesquisa sugerem que as manipulações para fins de divulgação realizadas no período estudado não estão relacionados a comportamentos considerados anormais apurados pelos modelos de BTD, pois os valores encontrados na análise de correlação são baixos. / This research has as objective to verify if the book-tax differences (BTD) can capture the opportunism of managers (Earnings Management EM) exists in Brazilian open-capital companies when isolated portion normally generated by the difference between the standards (accounting-tax misalignment NBTD), from 1999 to 2007. To test the question above, econometric models were used to isolate the opportunism behavior amending corporate profits. To verify the presence of earnings management the results obtained by the model proposed by Paulo (2007) (BR Model), which showed better results in Brazil, have been used. To isolate the opportunism through the formation of BTD was chosen the Tang (2006) empirical model, which is based on the conceptual framework of the same author and involves both variables linked to EM as to tax planning (TP) in its creation. International literature suggests that the introduction of variables representing TP in GR models reduces the measurement error portion of these models, promoting better identification of opportunistic behavior. Although studies in Brazil have identified the presence of EM in companies reports, studies involving taxable income are not common, except by those who use specific accounts for the identification of EM (e.g. deferred taxes). Additionally, this work proposes a model (BTD_BR) with variables that explain the BTD formation in national standards with statistical results more relevant to the Brazilian context than the model created by Tang (2006). These results suggest that the manipulations performed during the study period were due to behavior considered normal or predicted by the models, since the values found in the correlation analysis are low.