The Effects of Temporary Differences, Permanent Differences, and Firm Characteristics on Value Relevance of Earnings
Asian Tax Journal Vol. 9 No. 3 (2008), pp. 251-283
Abstract
The Objective of this study is to examine the effects of book-tax earnings differences, temporary differences and permanent differences on value relevance. The research samples are 1,730 KOSPI (Korea Composite Stock Price Index) listed firms and research period is 5-years from 2000 to 2004. I use Ohlson(1995) model as a main research model. My study is motivated primarily by recent fraudulent accounts and academic research demonstrating the role of book-tax earnings differences. I define book-tax earnings differences that after deducting income before income tax expense to each business year taxable income, dividing by weighted average current stocks number. The differences between book and taxable income may be large in spite of both book and taxable being prepared on an accrual basis. The main empirical results are followed : First, I find that income companies have the value relevance temporary differences than permanent differences and loss companies can not compare the value relevance between temporary differences and permanent differences. Second, The companies that book income are bigger(smaller) than taxable income have the value relevance temporary differences than permanent differences. Third, middle size companies have the value relevance temporary differences than permanent differences after companies sort by size. Finally, I study that the firm-years with large book-tax earnings differences have value relevance that are less than firm-years with small book-tax earnings differences. Concisely, I find that managers use the temporal differences than the permanent differences when they manage earnings. The contributions of this study are as follows. First, the information of book-tax earnings differences, temporary differences and permanent differences would likely provide additional information that would assist the information users including investors that they analysis value relevance. Second, I indicate the empirical results that have the value relevance temporary differences than permanent differences when the companies do earnings management.
Keywords
- Book-tax earnings differences
- temporary differences
- permanent differences
- income during each fiscal year
- value relevance
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