Knowledge that Transforms

57 2.5.3.5 Interaction Effects: Tax Variables 58 10

D. Eric Hirst, Patrick E. Hopkins, Comprehensive Income Reporting and Analysts' Valuation Judgments, Journal of Accounting Research, Vol. 36, Studies on Enhancing the Financial Reporting Model (1998), pp. 47-75

Thomas Hemmer, Steve Matsunaga, Terry Shevlin, Optimal Exercise and the Cost of Granting Employee Stock Options with a Reload Provision, Journal of Accounting Research, Vol. 36, No. 2 (Autumn, 1998), pp. 231-255

The Value Relevance of Intangibles: The Case of Software Capitalization Author(s): David Aboody and Baruch Lev Source: Journal of Accounting Research, Vol. 36, Studies on Enhancing the Financial Reporting Model (1998), pp. 161-191 Published by: Blackwell Publishing on behalf of Accounting Research Center, Booth School of Business, University of Chicago Stable URL: http://www.jstor.org/stable/2491312 Accessed: 14/09/2010 16:12

Taxation, Book-Tax conformity , IRS, Earnings management

Voluntary disclosure, Management forecasts, Disclosure costs, Disclosure policy

Using a model of corporate investment in which the deferred tax liability never reverses, I show that deferred taxes are a real economic burden whose value is the amount recognized multiplied by a fraction. The numerator of the fraction is the tax depreciation rate, and the denominator of the fraction is the sum of the tax depreciation rate and the cost of capital. Despite the requirement in Statement of Financial Accounting Standards No. 109: Accounting for Income Taxes (FASB [1992]), that a deferred tax liability or asset be recognized to reflect temporary differences between the book value and tax basis of assets, the valuation relevance of deferred taxes is an open question. Davidson [1958] shows that the deferred tax liability will grow indefinitely as long as investments generate new temporary differences at least as large as the temporary differences that reverse. Because deferred taxes are paid in the future but not discounted, their recognized values on financial statements are generally regarded to be overstated. Some have suggested their value is zero if the deferred tax liability never reverses; these arguments are cited in Stickney [1993,

Analyst forecasts, Analyst forecast errors, Correlated forecast errors, Private information

Profit allocation, Ancillary Trade, Decentralization, Coordination

Taxation, Foreign Tax Credits, Capital structure, Financing policy