Earnings Persistence Research Based On Book-Tax Differences

How to utilize the available financial and non-financial information to appraise the earnings quality is a lasting task in theory and practice. After 1994, corporate income tax rules and accounting rules have taken the moderately separating ways in China. Corporate income tax rules and corporate accounting rules are essentially two systems with differences that regulate the same transactions and events of the corporations according to their respective information needs of corporate income, which make appraising the earnings quality with tax information possible. Earnings persistence is one of the basic characteristics of earnings quality and also has great importance in securities pricing and investment analysis. According to searched papers, research that utilizes tax information to evaluate the earnings quality is only beginning, and so is the related empirical research.This paper investigates the persistence of earnings and its components for one-period-ahead earnings based on book-tax differences, and find that: first, in the whole, Chinese listed companies'book-tax differences are negative from 1999 to 2004, that is to say, the accounting incomes are larger than the taxable incomes; second, firm-years with large book-tax differences have earnings and its components that are less persistence than firm-years with small book-tax differences; third, firm-years with large positive asset impairment book-tax differences have earnings and its components that are less persistence than firm-years with small book-tax differences, but firm-years with large negative asset impairment book-tax differences have earnings and before-tax accrual above the line that are not less persistence than firm-years with small book-tax differences, and firm-years with large negative asset impairment book-tax differences have before-tax accrual under the line that are less persistence than firm-years with small book-tax differences; finally, on the average, the investors under-price the persistence of earnings and its components contained in the information of corporate book-tax differences.The main contributions of this paper include: (1) this paper firstly analyzes the primary factors influencing book-tax differences of Chinese listed companies and investigates the underlying theory that book-tax differences are indicating of earnings persistence; (2) this paper firstly reviews the literature of measuring book-tax differences, summarizes the measuring methods, and selects appropriate method to calculate the Chinese listed companies'book-tax differences from 1999 to 2004; (3) this paper firstly investigates the persistence of earnings and its components for one-period-ahead earnings based on book-tax differences in China; (4) this paper firstly studies the market pricing of the persistence of earnings and its components of Chinese listed companies contained in the book-tax differences.