Tax conformity of earnings and the pricing of accruals

Tax conformity of earnings and the pricing of accruals 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Tax conformity of earnings and the pricing of accruals

Loading next page...
 
/lp/springer_journal/tax-conformity-of-earnings-and-the-pricing-of-accruals-6q02CAI0tx
Publisher
Springer US
Copyright
Copyright © 2012 by Springer Science+Business Media, LLC
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-012-0275-2
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Mar 9, 2012

References

  • Risk, mispricing, and value investing
    Bartov, E; Myungim, K
  • Discretionary-accruals models and audit qualifications
    Bartov, E; Gul, F; Tsui, J
  • Investment performance of common stocks in relation to their price-earnings ratios: a test of the efficient market hypothesis
    Basu, S
  • Delisting returns and their effect on accounting-based market anomalies
    Beaver, W; McNichols, M; Price, R
  • The effect of audit quality on earnings management
    Becker, C; DeFond, M; Jiambalvo, J; Subramanyam, K
  • The effect of tax accounting rules on capital structure and discretionary accruals
    Calegari, M
  • Fundamentals and stock returns in Japan
    Chan, L; Hamao, Y; Lakonishok, J
  • Earnings-based and accrual-based market anomalies: one effect or two?
    Collins, D; Hribar, P
  • Detecting earnings management
    Dechow, P; Sloan, R; Sweeney, AP
  • The pricing of accruals for profit and loss firms
    Dopuch, N; Seethamraju, C; Weihong, X

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 12 million articles from more than
10,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Unlimited reading

Read as many articles as you need. Full articles with original layout, charts and figures. Read online, from anywhere.

Stay up to date

Keep up with your field with Personalized Recommendations and Follow Journals to get automatic updates.

Organize your research

It’s easy to organize your research with our built-in tools.

Your journals are on DeepDyve

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.

See the journals in your area

DeepDyve Freelancer

DeepDyve Pro

Price
FREE
$49/month

$360/year
Save searches from
Google Scholar,
PubMed
Create lists to
organize your research
Export lists, citations
Read DeepDyve articles
Abstract access only
Unlimited access to over
18 million full-text articles
Print
20 pages/month
PDF Discount
20% off