ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

A Study on the Relationship between Book－Tax Differences and Investment Levels Using Preliminary Earnings Announcements

  • Park, Sung Jong Hankyong National University
  • Kim, Seung Jun Anyang University

Asian Tax Journal Vol. 24 No. 3 (2023), pp. 169-194

Abstract

This study investigates the preliminary difference between accounting profit and taxable income, referred to as preliminary Book－Tax Differences (BTD), and empirically analyzes its effect on corporate investment and abnormal investment. Corporate investment is a vital activity that significantly impacts future growth potential. However, information asymmetry between shareholders and management can lead to overinvestment and, subsequently, to inefficient decision－making that might cause corporate insolvency. While previous studies have focused on profit management and tax avoidance as sources of information asymmetry, this study uniquely analyzes BTD, encompassing both profit management and tax avoidance, using preliminary performance data. The empirical analysis uses total investment (including tangible asset investment and R&D investment), as well as individual tangible asset investment and R&D investment data, from preliminary BTD for companies listed on the stock market and KOSDAQ that disclosed preliminary performance from 2014 to 2019. The empirical findings indicate that total investment and R&D investment increase as preliminary BTD increases. However, this increase in preliminary BTD also escalates the inefficiency of R&D investment. Interestingly, the level of investment in tangible assets appears unrelated to an increase in preliminary BTD. The significance of this study lies in its utilization of preliminary BTD, an estimate derived from tentative performance data rather than finalized data, providing valuable early insights into managerial discretionary intentions. Traditional analyses assessing profit quality or tax avoidance often encounter temporal lags due to information asymmetry, using final disclosure results. Therefore, the use of preliminary BTD in this study enables an earlier discernment of managerial intentions within the same fiscal year.

Keywords

  • investment
  • preliminary BTD
  • earnings quality
  • tax avoidance
  • inefficient investment

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