[Current reporting rules require inter-period tax allocation whereby the income tax expense reported in the income statement is determined on the basis of pretax book (accounting) income, adjusted for permanent differences between the period's taxable income and book income. The temporary differences accumulate on the balance sheet as a deferred tax liability and are assumed to reverse in future years, gradually reducing the liability. Opponents of interperiod tax allocation argue that reversal of these temporary differences is unlikely or will occur only in the remote future. Thus, support has developed for either partial allocation (e.g., allocating only short-term temporary differences) or no deferral at all. Regardless of such concerns, in 1987 the Financial Accounting Standards Board (FASB) reaffirmed the use of comprehensive interperiod tax allocation. In this study, we perform cross-sectional analyses relating unexpected stock returns around news disclosures about the Tax Reform Act of 1986 to pertinent firm characteristics in an attempt to assess whether the deferred tax liability is viewed as a liability. The main findings of the study are consistent with the hypothesis that investors view the deferred tax liability as a real liability. They appear to discount it according to the timing and likelihood of the liability's settlement. The remainder of the article is organized as follows. Section I describes the previous research on the informativeness of tax deferrals, outlines the hypotheses of this study, and details the procedures used to test them. Section II presents and discusses the results, and the final section provides concluding remarks.]

Presents cross-sectional analyses relating unexpected stock returns around news disclosures about the Tax Reform Act of 1986 (TRA) in the United States in the valuation of deferred tax liability. Previous research on the informativeness of tax deferrals; Study hypotheses and testing procedures; Events leading to the enactment of the TRA; Descriptive statistics.

The paper examines the power and reliability of the differential timeliness (DT) measure developed by Basu (1997) to gauge reporting conservatism. We identify certain characteristics of the information environment unrelated to conservatism that affect the DT measure and find that it is sensitive to the degree of uniformity in the content of the news during the examined period, the types of events occurring in the period, and firms' disclosure policies. Our tests, based on both actual and simulated data, indicate that assessing the extent of reporting conservatism using this measure requires the recognition of, and control for, these characteristics. We also find that the difference in the timeliness of reporting bad versus good news is likely to be more pronounced than previously reported. Further, we provide additional evidence on the negative association between the DT measure and alternative aspects of conservatism, suggesting that the exclusive reliance on any single measure to assess the overall conservatism of a reporting regime (firms, countries, or time periods) is likely to lead to incorrect inferences.

This study examines properties of analysts' cash flow forecasts and compares them to those exhibited by analysts' earnings forecasts. Our results indicate that analysts' cash flow forecasts are less accurate than analysts' earnings forecasts and improve at a slower rate during the forecast period. Further, cash flow forecasts appear to be a nai¨ve extension of analysts' earnings forecasts, thus providing limited information on expected changes in working capital. We also find that analysts' forecasts of cash flows are of limited information content and are only weakly associated with stock returns. Finally, estimating expected accruals as the difference between analysts' earnings forecasts and their cash flow forecasts does not result in a better detection of earnings management than achieved by commonly used accrual models.

We compare the quality of accounting numbers produced by two types of public firms—those with publicly traded equity and those with privately held equity that are nonetheless considered public by virtue of having publicly traded debt. We develop and test two hypotheses. The “demand” hypothesis holds that earnings of public equity firms are of higher quality than earnings of private equity firms due to stronger demand by shareholders and creditors for quality reporting. In contrast, the “opportunistic behavior” hypothesis posits that public equity firms, because their managers have a greater incentive to manage earnings, have lower earnings quality than their private equity peers. The results indicate that, consistent with the “opportunistic behavior” hypothesis, private equity firms have higher quality accruals and a lower propensity to manage income than public equity firms. We further find that public equity firms report more conservatively, in line with their greater litigation risk and agency costs.