The Information Content of Aggregate Book-Tax Differences.

• In Event: Strategic Disclosures 1

Abstract

This paper utilizes aggregate temporary book-tax differences to study the aggregate effect of managerial accounting discretion and GAAP-induced earnings distortion. The study finds that aggregate book-tax differences forecast excess market returns. The predictive content of aggregate book-tax differences derives primarily from the inter-temporal shifting of book income rather than that of taxable income. Under SFAS 109, the information content of aggregate book-tax differences for future excess market returns subsumes that of aggregate accruals. A time-series analysis of book-tax differences in relation to investor sentiments, however, rejects the “lean against the wind” hypothesis as a potential explanation for the predictive ability of aggregate book-tax differences. Further analysis provides consistent evidence of a risk-based explanation and traces the information content of book-tax differences to a growth dependent bias in GAAP earnings that comoves with time-varying risk premia.

Authors

• Xiaowen Jiang, Western Connecticut State University

• Pradyot K Sen, University of Washington Bothell