Abstract

The main objective of this study is to verify the relation of tax savings and quality of earnings. This study analyzed the relation of tax savings and quality of earnings based on basic model and Ohlson(1995) model for seven years(from 2000 to 2006) using 2,420 KOSPI companies as survey samples. In this research, the effective tax rate is the corporate income tax divided by the earnings before income tax. Net income is classified by tax savings and nontax income and standardized by dividing the number of weighted average floating stocks. The followings are the results of this study. The first, the earning persistence of nontax income is higher than not only the persistence of after tax income but also that of tax savings. The Second, the value relevance of nontax income is higher than the value relevance of tax savings. The third, the earning persistence can be verified by comparing the positive (＋) companies on tax savings and the negative (－) companies. However, there is no much difference on the value relevance. This study has the following meaningfulness. The first, the tax savings will be helpful to stock market participants as well as taxation policy makers. All interest holders can recognize the variation of tax savings and can evaluate the quality of earnings and the value of enterprise. As a result, the tax savings will be proved by the valuable information and it will be much helpful to analysis of company evaluation. The second, especially in stock market, the information users can make more reasonable decision after comparing nontax income and net income. The third, when a company makes public announcement, this study makes a case for companies to provide net income classified by the tax savings and nontax income information. This study makes a significant contribution to measuring earning persistence and company valuation using net income classified by the tax savings and nontax income. However, this study has the following limitations which need to be kept in mind in practical application. The first, this study analyzed KOSPI companies' financial data for verification of tax savings on persistence and value relevance of earnings but the result of this study can not be generalized to entire business entities. It will also bring meaningful result to broaden the range for financial business and business under legal management as well as KOSDAQ companies. The second, in the course of selecting the research samples, this study excluded the abnormal samples which the r－student value exceeded ± 2 but the abnormal samples need to be considered deliberately.

Keywords

• Persistence
• Value Relevance
• Tax savings
• Nontax income
• Effective tax rate

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