An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Anne Leah Jones
University of Massachusettes - Boston

Tracy J. Noga
Bentley College

Abstract: The Internal Revenue Service reports that there is a growing trend in Corporate America, corporate book-tax differences grew from no significant difference in 1992 to $159 billion in 1998. Recent studies have shown that larger book-tax differences are associated with weak earnings characteristics such as earnings management, low conservatism, low earnings persistence, smaller earnings price ratios, and smaller stock returns (Joos, Pratt et al. 2002; Manzon and Plesko 2002; Plesko 2002; Watts 2002; Desai 2003; Hanlon 2003; Phillips, Pincus et al. 2003; Hanlon 2005). Our empirical evidence shows that large book-tax differences today may also indicate an increased likelihood of financial distress in the future. As the debate over releasing corporate tax information to the investing public continues, we demonstrate that even the tax information currently disclosed in the financial statements can be useful in identifying firm risk.

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