AN INVESTIGATION OF THE INFORMATION CONTENT OF TAX ACCRUALS UNDER THE DEFERRED AND LIABILITY METHODS

In the past most firms accounted for the tax effect of interperiod temporary differences using the deferred method prescribed by {dollar}Lambda{dollar}PB Opinion No. 11. In February, 1992 FASB Statement No. 109 was issued which requires the use of the liability method. This study investigates the information content of both the deferred method and the liability method.; One hypothesis tested whether deferred method earnings had information content beyond that of flow-through earnings. The results did not support this hypothesis. However, when only firms common to all eight sample periods were tested, support for this hypothesis was indicated.; Another hypothesis tested whether liability method earnings had information content beyond that of flow-through earnings. When a 12 month cumulation period for abnormal returns was chosen, support for this hypothesis was indicated. However, when a 15 month cumulation period was used, this hypothesis was not supported.; A third hypothesis compared the association of both the deferred and liability methods with abnormal returns. This hypothesis posited that liability method earnings would have information content beyond that of deferred method earnings and that the deferred method earnings would not have information content beyond that of the liability method earnings. The results indicated that both methods contributed incremental information content when added to a model that contained only one of the earnings measures.; Two overall conclusions may be drawn from this study. First, there is some indication that earnings computed under both the deferred and liability methods have a greater association with abnormal returns than that provided by flow-through earnings. Second, both the deferred method earnings and the liability method earnings appear to provide and information increment to the market beyond that provided by using only deferred method earnings or using only liability method earnings.