The Effect of Book-Tax Difference on Earnings Quality: Empirical Evidence from KOSPI companies in Korea

Abstract

This paper investigates the role of temporary Book-Tax Differences(BTD) as a proxy for earnings quality using various measures to provide alternative indicators of earnings quality. Hence, it combines most frequently used hypotheses with some modifications. First, we partition total temporary BTD into its components such as large positive, large negative and small temporary BTDs. Then, we analyze the association between large temporary BTDs with discretionary accruals. Following that, the persistence of earnings will be examined when there are large positive and large negative BTDs. Lastly, the association between large temporary BTDs and future earnings will be studied to find the impact of large temporary BTDs on future earnings. Overall, the evidence suggests that temporary BTD can be a good choice for investors to analyze a particular companys earnings quality.

Keywords

• book tax difference
• temporary book tax differences
• discretionary accruals
• earnings persistence
• future earnings change