Abstract

Book－tax difference is the aggregate indicator in detecting manager's earnings management or tax planning. So it may have a limit to capture manager's intent or incentive to manage earnings or tax. Assuming BTD reflects not only the mechanical component due to difference between GAAP and tax law, but also the opportunistic component arising from manager's choices in book and tax reporting, This study tries to decompose BTD into the non－discretionary(mechanical) component and the discretionary(opportunistic) component in accordance with manager's discretion. And this investigates empirically the usefulness of the discretionary BTD whether it can detect manager's behavior of managing earnings or tax. Main methodologies in decomposing BTD are benchmarked by Tang(2006) model, Jones(1991) and modified Jones(1995) model. Also using logistic regression on the binary variable(dependent variable) whether manager manages earnings or tax, this study evaluates the usefulness of the discretionary BTD. And ROC analysis is used in investigating the diagnosis of discretionary BTD on earnings(tax) management. The result of binary logistic regression shows that the coefficients on earnings(tax) management and the discretionary BTD are significant statistically at the 0.01 level, indicating that the discretionary BTD is powerful measure to detect earnings(tax) management. And the discretionary BTD has incremental explanatory power regarding earnings(tax) management. Also as a result of ROC analysis, the discretionary BTD is the accuracy of measure more than discretionary accrual. Consequently, our empirical findings imply that BTD can be (sophisticated)decomposed into the discretionary and the non－discretionary BTD, and the discretionary BTD is powerful measure in detecting earnings management or tax planning.

Keywords

• earnings(tax) management
• decomposition of BTD
• discretionary BTD

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