The Persistence and Pricing of Earnings, Accruals, and Cash Flows When Firms Have Large Book-Tax Differences

2005 ◽  
Vol 80 (1) ◽  
pp. 137-166 ◽  
Author(s):  
Michelle Hanlon
Keyword(s):  
Cash Flows ◽  
Earnings Persistence ◽  
Taxable Income ◽  
Future Earnings ◽  
Special Items ◽  
Potential Sources ◽  
Red Flag

I investigate the role of book-tax differences in indicating the persistence of earnings, accruals, and cash flows for one-period-ahead earnings. I also examine whether the level of book-tax differences influences investors' assessments of future earnings persistence. I find that firm-years with large book-tax differences have earnings that are less persistent than firm-years with small book-tax differences. Further, the evidence is consistent with investors interpreting large positive book-tax differences (book income greater than taxable income) as a “red flag” and reducing their expectation of future earnings persistence for these firm-years. I then investigate potential sources of the lower persistence for firm-years with large book-tax differences. I find that special items contribute in part to the results but that firm-years with large booktax differences continue to have lower persistence in earnings after controlling for the effect of the special items.

scholarly journals The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors

2002 ◽  
Vol 77 (s-1) ◽  
pp. 35-59 ◽  
Author(s):  
Patricia M. Dechow ◽  
Ilia D. Dichev
Keyword(s):  
Estimation Error ◽  
Cash Flows ◽  
Empirical Measure ◽  
Earnings Persistence ◽  
Working Capital ◽  
Estimation Errors ◽  
Accrual Quality ◽  
Flows Over Time

This paper suggests a new measure of one aspect of the quality of working capital accruals and earnings. One role of accruals is to shift or adjust the recognition of cash flows over time so that the adjusted numbers (earnings) better measure firm performance. However, accruals require assumptions and estimates of future cash flows. We argue that the quality of accruals and earnings is decreasing in the magnitude of estimation error in accruals. We derive an empirical measure of accrual quality as the residuals from firm-specific regressions of changes in working capital on past, present, and future operating cash flows. We document that observable firm characteristics can be used as instruments for accrual quality (e.g., volatility of accruals and volatility of earnings). Finally, we show that our measure of accrual quality is positively related to earnings persistence.

Do PCAOB Inspections Improve Working Capital Accrual Reliability? Evidence from the PCAOB Annual versus Triennial Inspection Exposure

2020 ◽  
Vol 34 (2) ◽  
pp. 147-166 ◽  
Author(s):  
Cheol Lee ◽  
Jong Eun Lee ◽  
Myung Seok Park
Keyword(s):  
Cash Flow ◽  
Cash Flows ◽  
Data Availability ◽  
Earnings Persistence ◽  
Working Capital ◽  
Improve Working ◽  
Future Earnings ◽  
Public Company ◽  
Jel Classifications ◽  
Better Than

SYNOPSIS In this study, we examine whether the ability of working capital (WC) accruals to predict future earnings and cash flows differs between registrants whose auditors are subject to annual Public Company Accounting Oversight Board (PCAOB) inspections and those whose auditors are subject to triennial PCAOB inspections. We find that WC accruals of clients audited by auditors subject to annual PCAOB inspections enhance earnings persistence more and map into future cash flow realizations better than those audited by auditors subject to triennial PCAOB inspections. These findings are stronger for operating asset accruals than for operating liability accruals. Furthermore, after PCAOB inspection reports are released, improvements in WC accrual reliability are more evident for clients audited by annually inspected auditors than for clients audited by triennially inspected auditors. Overall, our findings suggest that more frequent PCAOB inspections help to improve WC accrual reliability. JEL Classifications: M41; M42; M48. Data Availability: The data are publicly available from the sources identified in the paper.

scholarly journals Book-Tax Differences and the Persistence of Earnings and Accruals: Tunisian Evidence

2016 ◽  
Vol 12 (6) ◽  
pp. 193 ◽  
Author(s):  
Wiem Dridi ◽  
Boubaker Adel
Keyword(s):  
Multiple Regression ◽  
Cash Flows ◽  
Earnings Persistence ◽  
Taxable Income ◽  
Useful Signal ◽  
The Difference

<p>This study aims to investigate whether the persistence of earnings, accruals and cash flows are influenced by the difference between accounting and taxable income (book-tax differences; BTD). This investigation helps in two research lines. First we have expanded the literature that interprets the BTD. We used the discretionary part of the BTD to estimate managerial manipulation. Our contribution is to use a different method to estimate the BTD through the residual of a multiple regression. Secondly, we attempted to investigate whether discretionary BTD appear to serve as a useful signal of earnings persistence. We test the model with a sample of 21 listed Tunisian firms in the period from 2003 to 2012. The results illustrate the importance of BTD in indicating the persistence of earnings and accruals.</p>

Taxable Income, Future Earnings, and Equity Values

2004 ◽  
Vol 79 (4) ◽  
pp. 1039-1074 ◽  
Author(s):  
Baruch Lev ◽  
Doron Nissim
Keyword(s):  
Stock Returns ◽  
Cash Flows ◽  
Financial Accounting ◽  
Price Ratio ◽  
Taxable Income ◽  
Future Earnings ◽  
Valuation Allowance ◽  
Equity Values ◽  
Before And After ◽  
Income Ratio

We investigate the ability of a tax-based fundamental—the ratio of tax-to-book income—to predict earnings growth and stock returns and to explain the earnings-price ratio. This tax fundamental reflects both temporary and permanent book-tax differences as well as tax accruals, such as changes in the tax valuation allowance. We find that the tax-to-book income ratio predicts subsequent five-year earnings changes, both before and after the implementation of Statement of Financial Accounting Standards (SFAS) No. 109 in 1993. For the pre-SFAS No. 109 period, the tax information is unrelated to contemporaneous earnings-price ratios and strongly related to subsequent stock returns. Conversely, for the post-SFAS No. 109 period, the tax fundamental is strongly related to contemporaneous earnings-price ratios and only weakly related to subsequent stock returns, indicating improvement over time in investors' perceptions of the implications of the tax information for future earnings. Deferred taxes, a component of our tax fundamental and the focus of recent research, exhibits relatively modest ability to predict earnings or stock returns both before and after the implementation of SFAS No. 109. Finally, throughout the examined period, the taxable income information about future earnings is incremental to that in accruals and cash flows.

scholarly journals Pengaruh Volatilitas Arus Kas, Volatilitas Penjualan, Dan Perbedaan Laba Akuntansi Dengan Laba Fiskal Terhadap Persistensi Laba

2020 ◽  
Vol 2 (1) ◽  
pp. 2129-2141
Author(s):  
Doli Andi ◽  
Mia Angelina Setiawan
Keyword(s):  
Regression Analysis ◽  
Sampling Method ◽  
Stock Exchange ◽  
Secondary Data ◽  
Cash Flows ◽  
Earnings Persistence ◽  
Panel Regression ◽  
Manufacturing Companies ◽  
Taxable Income ◽  
Negative Effect

This study aimed to examine the effect of the volatility of cash flows, sales volatility and differences in accounting income with taxable income of the persistence of earnings. This research is classified research causative. The population in this research is manufacturing companies listed in Indonesia Stock Exchange in 2014-2018. By using purposive sampling method, there are 42 companies as samples. The data used is secondary data obtained from www.idx.co.id. The analytical method used is a panel regression analysis. The results of this study indicate that the volatility of cash flow and significant negative effect on the persistence of earnings, while variable sales volatility and differences in accounting income to taxable income has no effect on earnings persistence.

An Analysis of the Sources of Value Loss Following Financial Restatements

2021 ◽  
pp. 0148558X2198991
Author(s):  
Philip K. Hong ◽  
Jaywon Lee ◽  
Sang-Hyun Park ◽  
Sukesh Patro
Keyword(s):  
Stock Returns ◽  
Cash Flow ◽  
Discount Rate ◽  
Stock Price ◽  
Cash Flows ◽  
Financial Fraud ◽  
Earnings Persistence ◽  
Flow Component ◽  
Financial Restatements ◽  
Value Loss

We decompose the total value loss around firms’ announcements of financial restatements into components arising from investors’ revisions in cash flows and discount rates. First, relative to population benchmarks, restatements represent circumstances in which the cash flow component becomes more important in explaining valuations. While we find significant contributions from both sources, with the cash flow component explaining more than 33% of the variation in stock returns surrounding restatement announcements, this component explains only 13% to 22% in comparable non-restating firms. When restatements are caused by underlying financial fraud, the discount rate impact becomes more important, explaining about 88% of return variation. On the contrary, the cash flow impact is relatively larger for firms with higher earnings persistence or restatements associated with errors. Our decomposition of the value loss helps explain returns in the post-announcement period. Firms with a higher relative discount rate impact experience a significant downward stock price drift after the initial announcement-related price decline. For firms with a higher relative cash flow impact, the evidence suggests the initial impact of the restatement announcement is more complete with no subsequent drift pattern. Our findings close gaps in the evidence on financial restatements and extend the literature on the drivers of stock price movements.

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