The Information Role of the Increase of Net Deferred Tax Liabilities as Measure of Firm’s Tax Benefits28)
Asian Tax Journal Vol. 16 No. 3 (2015), pp. 101-135
Abstract
There are several studies on deferred tax expense in terms of the proxy of the earning management. But in Korea, government has made tax deferment incentives to execute the economic policies. If the firms make use of these kinds of government tax deferment incentives, their deferred tax liability account will increase. The assumption of our research is that the net deferred tax liabilities come from the application of the tax deferment incentive law by the firms, not from earning management. This net deferred tax liabilities also will have a positive impact on the stock returns of the firms. The research is based on the samples of KOSPI and KOSDAQ listed firms from 2001 to 2013 and the major results are as follows. First, if the deferred taxes are the results of the firm’s earning management, the relation between the net deferred tax liabilities and next year’s earning improvement should be negative due to the mean revert propensity of the earning management. But our results show the positive correlations between the net deferred tax liabilities and next year’s earning improvement and additional analyses show the relation between the net deferred tax liabilities and deferred tax incentive factor is stronger than the relation between the net deferred tax liabilities and earning management proxy, which means net deferred tax liabilities represent more tax deferment than earning management. Second, net deferred tax liabilities have additional explanatory power on the firm’s stock returns and have positive correlations with them, which means the positive cash flow effects of the tax deferment result in excess stock return. Third, even after the K－IFRS which regulates the fair valuation of assets from which net deferred tax liabilities may arise, it is still proven that there are positive correlations between stock return and net deferred tax liabilities which explain the cash flow effects of tax deferment still work significantly on the market returns. This study sees deferred tax as the firm’s benefit of tax deferment granted by government, rather than the proxy of earning managements and shows the deferred tax has positive correlations with the stock returns and the next year’s earning improvement. Considering Korean tax environment which reflects government directed economic policy, the meaning of deferred tax should be differently explained.
Keywords
- Net Deferred Tax Liabilities
- Tax Benefit
- Earning Management
- Returns
- Tax Deferment
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