Journal Search Engine
Search Advanced Search Adode Reader(link)
Download PDF Export Citaion korean bibliography PMC previewer
ISSN : 2233-4165(Print)
ISSN : 2233-5382(Online)
Journal of Industrial Distribution & Business Vol.11 No.4 pp.39-46
DOI : http://dx.doi.org/10.13106/jidb.2020.vol11.no4.39

The Relationship between Discretionary Revenues and Book-Tax Difference

Sangkwon CHA*,Jiyeon YOO**
**Co Author: Assistant Professor, The Department of Accounting, Sangji University, Seoul, Korea, Email: wldus1005@daum.net

© Copyright: Korean Distribution Science Association (KODISA)
This is an Open Access article distributed under the terms of the Creative Commons Attribution Non- Commercial License (https://creativecommons.org/licenses/by-nc/4.0/) which permits unrestricted noncommercial use, distribution, and reproduction in any medium, provided the original work is properly cited.
*First Author and Corresponding Author: Ph.D. Candidate, The Department of Accounting, Hanyang University, Seoul, Korea, Email: sangkwon@hanyang.ac.kr

Abstract

Purpose: This study looks at the relevance between discretionary revenue and book-tax differences (hereafter BTDs). While the study of earnings management, which focused on discretionary accruals and real earnings management, has largely made, it has not yet been actively researched on discretionary revenues. Therefore, it was believed that discretionary revenue would expand the preceding study by looking at its relevance to BTD, known as financial reporting quality and measures of tax avoidance. In general, prior research suggested that earnings management make BTDs larger. Thus, the relationship between discretionary revenue and the amount of BTD is predicted positive. Research design, data and methodology: To this end, the method of discretionary revenues was used and BTDs measured in four ways. First, Earnings before income tax – estimated taxable income divided by total asset (BTD). Second is fractional rank variable of BTDs (FBTD). Third is Indicator variable equals 1 if the firm-year has a positive BTD, 0 otherwise (PBTD). Fourth is that Indicator variable equals 1 if the firm-year has a BTDs in top(bottom) quartile, 0 otherwise (LPBTD, LNBTD). 4,251 samples were analyzed in the Korean Security market (KOSPI) from 2003 to 2014. Results Empirical analysis shows that BTDs increases as discretionary revenue increases. These results were equally observed when BTDs was measured as a ranking variable or as a indicating variable. These results indicate that earnings management through the revenue of managers exacerbate the quality of financial reporting. Conclusions: In sum, discretionary revenues can be used as an indicator of making BTDs larger and meaningful as the first study of the Korean capital market where discretionary revenues affect accounting information quality. Investors need to increase interest in discretionary revenues because intervention in financial reporting through revenue accounts by managers can increase information asymmetry and agency costs. This means that studies on discretionary revenues that have been relatively small should be expanded. The results also provide important implications for the relevant authorities and investors. Despite these benefits, however, measurement error problems with estimates still appear as limited points, and prudent interpretations are required, and additional follow-up studies are needed in that variables that are not yet considered in this study may affect our findings.

JEL Classification Code : M11, M40, M41

초록


    Figure

    Table

    Reference

    1. Ahn, Y. Y., Shin, Y. H., & Chang, J. H. (2005). The relationship between the foreign investor and information asymmetry, Korean Accounting Review, 30(4), 109-131.
    2. Aziz, J., Ji, S. H., & Lee, K. B. (2019). A study on the relevance between book-tax difference and earnings information, Tax Accounting Research, 59, 117-135.
    3. Becker, C. L., DeFond, M. L., & Jiambalvo, J. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1-24.
    4. Blaylock, B., Shevlin, T., & Wilson, R. J. (2011). Tax avoidance, large positive temporary book-tax differences, and earnings persistence. The Accounting Review, 87(1), 91-120.
    5. Cha, S. K., & Choi, H. J. (2020). The impact of overvaluation on analyst’s forecasting errors. The Journal of Industrial Distribution & Business, 11(1), 39-47.
    6. Cha, S. K., & Jin, S. H. (2017). Market Concentration and Tax Avoidance, Tax and Accounting Review, 6(1), 177-211.
    7. Cha, S. K., & Park, M. H. (2020). The Empirical Study of Relationship between Product Market Competition Structure and Overvaluation, Journal of Distribution Science, 18(2), 99-108.
    8. Cha, S. K., Hwang S. P., & Kim, Y. B. (2019) Business Strategy and Overvaluation: Evidence from Korea, The Journal of Asian Finance, Economics and Business, 6(4), 83-90.
    9. Cho, Y. E., Choi, M. H., & Lee, J. S. (2011). Book-tax differences, earnings management, and tax avoidance, Accounting Information Review, 29(1), 231-260.
    10. Chun, H. M., & Shim, J. Y. (2017), A comparison of Investors’ and Analyst’s Biases in interpreting book-tax difference: Evidence from Korean Stock Market, Global Business and Finance Review, 22(2), 16-33.
    11. Crabtree, A., & Maher, J. J. (2009). The influence of differences in taxable income and book income on the bond credit market. Journal of the American Taxation Association, 31(1), 75-99.
    12. Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(s-1), 35-59.
    13. Dechow, P. M., & Schrand, C. M. (2004). Earnings quality. CFA Institute, U.S
    14. Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193-225.
    15. Hwang, J. S. (2012). The effect of corporate governance on the relations among book-tax differences and earnings persistence, Korean International Accounting Review, 43, 123-146.
    16. Jackson, M. (2015). Book-tax differences and future earnings changes. The Journal of the American Taxation Association, 37(2), 49-73.
    17. Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193-228.
    18. Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163-197.
    19. Lee, K. B., Ji, S. H., Ryu, Y. R., & Kim, S. J. (2014). Firm governance and the volatility of book-tax difference, Journal of Finance and Accounting Information, 14(3), 21-38.
    20. Lev, B., & Nissim, D. (2004). Taxable income, future earnings, and equity values. The Accounting Review, 79(4), 1039-1074.
    21. Oh, K. W., & Ki, E. S. (2020). The Effect of Tax-Related Information on Pre-Tax Income Forecast and Value Relevance, The Journal of Asian Finance, Economics and Business, 7(1), 81-90.
    22. Park, J. I., & Jeon, K. A. (2008). The effect of audit quality on book-tax differences, Korean Accounting Review, 33(2), 65-109.
    23. Park, J. I., & Yoon, S. R. (2014). Empirical evidence on the relationship between discretionary accruals and cost of debt, Korean Accounting Review, 39(3), 359-410.
    24. Park, J. I., Ki, E. S., & Kwon, S. Y. (2014). A review and some now evidence on the effect of boo-tax differences on bond rating, Korean Accounting Review, 39(3), 1-55.
    25. Plesko, G. A. (2007). Estimates of the magnitude of financial and tax reporting conflicts, Proceedings of National Bureau of Economic Research.1-58
    26. Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335-370.
    27. Stubben, S. R. (2010). Discretionary revenues as a measure of earnings management. The Accounting Review, 85(2), 695-717.
    28. Turner, L. E., & Weirich, T. R. (2006). A closer look at financial statement restatements. The CPA Journal, 76(12), 12-23