The primary purpose of this study is to investigate whether the market prices discretionary and non-discretionary tax accruals. Previous studies have examined the persistence of total accruals (Sloan in Account Rev 71(3):289–315, 1996) and the persistence of discretionary and non-discretionary components of total accruals (Xie in Account Rev 76(3):357–373, 2001). These studies do not investigate the tax components of accruals. We argue that tax accruals are mispriced more than book accruals because of the complexity of tax accruals in assessing future earnings. We use a sample of 6,397 firms and the Mishkin model to investigate whether the market overvalues tax accruals more than book accruals. Descriptive statistics show that firms are increasingly using more income decreasing tax accruals than income-increasing book accruals contributing to the growing divergence between tax and book earnings. Results from the Mishkin test show that the overpricing of tax accruals is more severe than that for book accruals. Finally, hedge portfolio tests show that investors can earn excess returns using a hedging strategy based on tax accruals. Interestingly, excess returns based on a hedging strategy using book accruals almost disappear.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Mar 9, 2012
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.
Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.
All the latest content is available, no embargo periods.
“Hi guys, I cannot tell you how much I love this resource. Incredible. I really believe you've hit the nail on the head with this site in regards to solving the research-purchase issue.”Daniel C.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud
“I must say, @deepdyve is a fabulous solution to the independent researcher's problem of #access to #information.”@deepthiw
“My last article couldn't be possible without the platform @deepdyve that makes journal papers cheaper.”@JoseServera