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Does firm Life Cycle Explain the Relation Between Book-Tax Differences and Earnings Persistence?

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

Identiferoai:union.ndltd.org:asu.edu/item:15021
Date January 2012
ContributorsDrake, Katharine (Author), Mikhail, Michael (Advisor), Brown, Jennifer (Committee member), Martin, Melissa (Committee member), Arizona State University (Publisher)
Source SetsArizona State University
LanguageEnglish
Detected LanguageEnglish
TypeDoctoral Dissertation
Format75 pages
Rightshttp://rightsstatements.org/vocab/InC/1.0/, All Rights Reserved

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