ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Effect of Book-Tax Difference, Temporary Difference, and Changes in Net Deferred Tax Assets and Liabilities on Analysts' Earnings Forecasts

  • Park, Jong Il Chungbuk National University
  • Jeon, Kyu An Soongsil University
  • Roh, Hee Chun Soongsil University

Asian Tax Journal Vol. 10 No. 2 (2009), pp. 225-260

Abstract

Academic researchers have become increasingly interested in book-tax differences. Much recent work in accounting has focused on the potential of book-tax differences to detect earnings management(Phillips et al. 2003; Lev and Nissim 2004; Hanlon 2005; Weber 2005). This paper investigates whether analyst's forecasting earnings correctly reflect the book-tax differences(BTD) as a earnings quality. Analysts' forecasting behavior play a role in the capital market efficiency as information intermediaries. Furthermore, we investigates analyst's forecasting earnings reflect temporary differences(TD) and also net deferred tax expense(NDTE). The sample consists of non-banking firms (maximum 895 firm-years) with a December fiscal year-end listed on the Korean Stock Exchange over 2000-2004. The data on analysts' earnings forecasts are collected from Fn-DataGudie Pro database. Other firm-specific financial data are collected from KIS-Value II database. The analysts' forecasts data are collected fourth per year. Empirical results suggest that BTD is significantly negative associated with the errors and accuracy in analysts' earnings forecasts. As the larger amount of BTD(the lesser earnings quality), analysts' earnings forecasts become less optimistically(or more pessimistic) biased and the absolute magnitude of the errors decreases. This results also suggest that analysts success to consider at least some of the implications of BTD. Also, as expected, we find that TD and/or NDTE is similar to BTD's results. Our finding complement and extend the evidence in Bradshaw et al.(2001), Ahmed et al.(2001), Lim and Jeong(2006), and Weber(2005) that analysts do not incorporate the predictable future earnings declined associated with high accrual or the ratio estimated tax income to book income in forecasting earnings. Inconsistent with prior research we find that analysts' forecasts are efficient with respect to BTD, in that their forecast errors are a function of prior BTD. This work contribute to several lines of existing research in earnings management and analyst's forecasts related study. As well, the findings of this study support the importance on the further detailed disclosure on the tax income.

Keywords

  • Book-Tax Differences
  • Temporary Differences
  • Changes in Net Deferred Tax Assets and Liabilities
  • Quality of Earnings
  • Analyst's Earnings Forecasts Error and Bias
  • Accuracy

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