Effects of Auditor-Provided Tax Services on Book-Tax Differences and Investors’ Mispricing of Book-Tax Differences

• In Event: Auditor Expertise

Abstract

This study first investigates whether auditor-provided tax services (ATS) improve or impair audit quality by examining the relation between ATS and firms’ levels of book-tax differences. My results show that ATS are negatively related to book-tax differences, suggesting that ATS improve the overall audit quality through knowledge spillover and reduce aggressive financial and/or tax reporting. Moreover, I examine whether improved earnings quality for firms acquiring ATS in turn leads to reduced mispricing of book-tax differences among investors. Recent studies document that despite the rich information about firms’ future earnings contained in book-tax differences, investors process such information inefficiently, leading to systematic pricing errors among firms with large book-tax differences. My empirical evidence indicates that ATS mitigate such mispricing, with pricing errors being lower among firms acquiring ATS compared with firms without ATS.

Author

• Bing Luo, San Francisco State University