이연법인세 자산에 대한 미래법인세효과의 실현가능성과 발생액의 질 및 이익지속성 = Realizability of Future Tax Expenses in Deferred Tax Assets, Accrual Quality and Earnings Persistence

다국어 초록 (Multilingual Abstract)

This study examines the effect of managerial discretion in determining realizability of future tax expenses on accrual quality and earnings persistence for firms that report deferred tax assets. Current GAAP mandates firms to report deferred tax assets only when future tax expenses related to deferred tax assets are highly realizable. However, whether the realizability of future tax expenses is high enough to report deferred tax assets depends mainly manager`s subjective judgment. Accordingly, accounting for deferred taxes provides managers with opportunistic incentives for managing earnings by exercising their discretion in recognizing deferred tax assets. That is, managers are likely to manage earnings and equity book value through their subjective decisions on the realizability of future tax expenses related to deferred tax assets. Thus, a manager who has greater incentives for managing earnings than others will recognize deferred tax assets more or less by exercising discretion opportunistically on the realizability of future tax expenses, which is likely to distort earnings. In this study, we attempt to evaluate such opportunistic behavior by examining accrual quality and/or earnings persistence. Specifically, it is hypothesized that accrual quality and/or earnings persistence are lower for firms with lower realizability of future tax expenses than for those with higher realizability of future tax expenses. We adopt the measures of accrual quality and earnings persistence from Dechow and Dichev (2002) and Sloan (1996), respectively. Further, following Miller and Skinner (1998), the realizability is measured as (i) average past profitability relative to deferred tax assets, (ii) loss carry-forward, (iii) average past ROE, (iv) one-year-ahead realized ROE, (v) price-book ratios, and (vi) the number of consecutive years of dividends paid. Empirical analysis is performed for the sample of 649 non-banking firms listed on the Korean Stock Exchange that report deferred tax assets over 1999-2002. We compare accrual quality and earnings persistence between two groups partitioned on the realizability of future tax expenses as indicated by deferred tax assets. Empirical findings show that earnings of firms with lower realizability of future tax expenses have lower quality of accrual components and are less persistent than earnings of firms with higher realizability of future tax expenses, as hypothesized when the realizability is measured as (i) average past profitability relative to deferred tax assets, (ii) loss carry-forward, (iii) price-book ratios, and (iv) the number of consecutive years of dividends paid. To the extent that deferred tax assets reflect managers` discretion in the realizability of future tax expenses when determining deferred tax assets, these results suggest that deferred tax assets are exploited as an important means to earnings management and that such opportunistic earnings management is in turn evaluated by examining accrual quality and earnings persistence. Thus, financial statement users could rely on such information to evaluate quality of earnings and make their investment decision, and standard-setters and auditors should pay more attention to a reliable measurement of realizability of future tax expenses and deferred tax assets.