Empirical Evidence on the Impact of Book-Tax Differences on Divergence of Opinion among Investors

Joseph Comprix · Roger C. Graham · Jared A. Moore

116 citations0/0 files storedJournal of the American Taxation Association

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Corporate Taxation and Avoidance

Abstract

ABSTRACT: It is well known that the objectives of financial accounting and tax accounting sometimes conflict, resulting in book-tax differences (BTDs). In this study we test for associations between measures of BTDs and measures of market participants’ uncertainty regarding the information conveyed in financial reports. The measures of market participant uncertainty are: (1) share turnover, (2) analyst forecast dispersion, and (3) stock return variance. We find positive associations between levels and variability of total BTDs and the three measures. After disaggregating BTDs into their permanent and temporary components, we find that both are positively associated with market uncertainty, although the permanent component of BTDs is generally more strongly and consistently associated with measures of uncertainty than is the temporary component. We interpret these results, in part, as indicative of the possible effect of uncertainty contained in BTDs, especially permanent BTDs, on the precision of the information conveyed in the financial statements.

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References

1977RISK, UNCERTAINTY, AND DIVERGENCE OF OPINION 2000The Economic Consequences of Increased Disclosure 2005Corporate tax avoidance and high-powered incentives 1999The Economic Consequences of Increased Disclosure 1993Differences of Opinion Make a Horse Race 2009Tax Reporting Aggressiveness and Its Relation to Aggressive Financial Reporting 2009An Examination of Corporate Tax Shelter Participants 1990Financial Intermediaries and Liquidity Creation

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