Book-Tax Differences And Earnings Persistence

Accounting earnings has become one of capital market investing criteria for investors. Accounting earnings contains with the quality and quantity of features. Quality has been hidden and been as a black box by the accounting professions. How to utilize the available financial and non-financial information to appraise the earnings quality is a lasting task in theory and practice. the new accounting standards implement in 2006, the international convergence of accounting standards is realized. The pattern of accounting and tax separation is basically established, which gives book-tax differences a wealth of information content. A large number of studies have indicated that the magnitude of the book income from the taxable income can direct earnings management behavior of enterprises. However, tax revenue is relatively rigid compared with accounting earnings and less susceptible to control by the management. It is with a certain degree of independence opposed to internal financial indicator. Earnings persistence is one of the basic characteristics of earnings quality and also has great importance in securities pricing and investment analysis. This dissertation is focused on the earnings persistence issues of China’s listed companies from the tax perspective.By analyzing book-tax differences and earnings persistence, we try to provide a relatively independent analysis of indicator for capital market investors and the securities regulatory authorities, and try to provide an effective method for tax authorities to screen and supervise tax evasion.I select data of listed companies from 2008 to 2014 in this paper. And I combine theoretical analysis and empirical analysis in this paper. I attempt to asses earnings persistence and information content of book-tax difference in the perspective of book-tax differences. Because of the different effects of different sources of book-tax to earnings persistence, this paper further will group book-tax differences according to different sources. all companies are grouped as the earnings management company and the benchmark company, and this paper will investigate persistent information contained in the book-tax differences which come from different scourses. I want to reveal the mechanism of book-tax differences and earnings persistence. The paper,s main conclusions include: the first, firms which have large book-tax differences have less persistence earnings than firms which have small book-tax differences; it means that book-tax differences can serve as a useful signal of earnings persistence. The second, after controlling the magnitude of accruals, firms which have large book-tax differences have less persistence earnings than firms which have small book-tax differences. It means that book-tax differences provide incremental information. Third, the mechanism of the relationship between book-tax differences and earnings persistence is that, large book-tax differences can make a perspective to the earnings management behavior of enterprises, and book-tax differences which come from the earnings management means lower earnings persistence than book-tax differences which come from institutional factors and tax avoidance. In the large book-tax differences group, the proportion of companies with earnings management is higher than that of small book-tax differences group, and the persistence of earnings management company is lower than that of benchmark company. This shows that the book-tax differences which comes from earnings management reduces the persistence of earnings. Investors will be more concerned about the book-tax differences which comes from earnings management when they regard book-tax differences as a indicator of earnings persistence. The results of this study indicate that book-tax differences can be used as a new indicator of earnings persistence.According to the conclusions, this paper puts the following recommendations:(1) We shall formulate tax information disclosure rules, and standard the content of disclosure rules of our income tax information.(2) Incorporating book-tax differences into the analyst’s financial analysis, and help to improve the quality of investment decisions of investors.