Research On The Information Content Of Accounting - Tax Difference

Book-tax differences are the differences between total profit and taxable income.Book income is determined by the accounting method according to AccountingStandards for Business Enterprises. And it is a direct reflection of the enterprise in acertain period of financial and business conditions. The taxable income is the basiswhen the tax authorities imposing business income taxes. The guidelines of newaccounting formally come into effect in2007while the new corporate income tax lawbegan in2008. Starting form this period, the book-tax differences has occurredprofound changes and it is becoming bigger and bigger. In order to adapt to thedevelopment of the market economy, the accounting standards and tax laws had beenchanged into the mode of moderate separation. The book-tax differences are not onlycaused by institution variance, but also connected with earnings management and taxavoidance. They are the consequences of managers’ opportunism behavior. On thebasis of book-tax differences, the managers have the incentives to simultaneouslyoperate the total profit and taxable income to meet their own interest. Therefore, thebook-tax differences may be the performance of low earnings quality.To test whether book-tax differences have information content, and whetherstock market investors can use the information in it to expect future performance andimproving the efficiency of decision-making, this paper selects the research samplefrom2008to2012in the listed corporation. Firstly, we construct the book-taxdifferences variable. Then we form a portfolio according the relationship between thevariable and future earnings performance. Thirdly, we screen listed companies furtheron the basis of accounting accruals. This paper chooses event study in long eventwindow to calculate if the portfolio can earn abnormal return. If the abnormal returnis obviously not zero, it explains that the information in book-tax differences havechanged the investors’ anticipation in valuing the company, and it can provide usefulinformation for investors, which we call that book-tax differences have informationcontent. In addition, book-tax differences can be divided into the temporary one andpermanent one. This paper also studies which part is related to future earnings growthand can provide investors for useful messages.With the analysis and research, we conclude that book-tax differences variable TI/BI is positively correlated with future earning growth and temporary book-taxdifferences variable TEMP/BI has negative correlation with future earning growth.Permanent book-tax differences variable PERM/BI is negative with future earninggrowth. What’s more, all the portfolios can earn abnormal return which is obviouslynot zero. The results suggest that both book-tax differences and its components haveinformation content. They can provide useful information to help investors to make adecision. Last but not least, the listed companies with book-tax differences featureon the basis of accounting accruals can earn higher abnormal return than the singleportfolio. It concludes that book-tax differences can provide incremental informationon the basis of accruals.