Does firm life cycle explain the relation between book-tax differences and earnings persistence?
Description
Existing literature consistently documents a relationship between book-tax differences and future financial performance. Specifically, large book-tax differences are associated with lower earnings persistence. I contend that one reason the tax information contained in financial statements is informative about future earnings is that the relationship between book income and taxable income captures information about a firm's life cycle stage. Using a life cycle measure from the literature, I use fundamental analysis to group firm-year observations into life cycle stages and document a link between book-tax differences and firm life cycle. I build on prior studies that find a relation between earnings persistence and book-tax differences, and earnings persistence and firm life cycle. I find that after controlling for firm life cycle stage, the association between large positive book-tax differences and lower earnings persistence does not hold. My results offer an economic theory based explanation for the relation between book-tax differences and earnings persistence as an alternative explanation to findings in prior research.
Date Created
The date the item was original created (prior to any relationship with the ASU Digital Repositories.)
2012
Agent
- Author (aut): Drake, Katharine D
- Thesis advisor (ths): Mikhail, Michael
- Committee member: Brown, Jennifer
- Committee member: Martin, Melissa
- Publisher (pbl): Arizona State University