Do Taxes Still Affect Earning Persistence?

Ângela Pereira, Cláudia Pereira (), Luís Gomes and Armindo Lima
Additional contact information
Ângela Pereira: Accounting/ISCAP/Polytechnic of Porto, 4465-004 Matosinhos, Portugal
Cláudia Pereira: Accounting/CEOS.PP/ISCAP/Polytechnic of Porto, 4465-004 Matosinhos, Portugal
Luís Gomes: Management/CEOS.PP/ISCAP/Polytechnic of Porto, 4465-004 Matosinhos, Portugal
Armindo Lima: Accounting/CEOS.PP/ISCAP/Polytechnic of Porto, 4465-004 Matosinhos, Portugal

Administrative Sciences, 2023, vol. 13, issue 2, 1-13

Abstract: While financial statements are the primary source of information about a firm, they tend to be under earnings management practices, namely to avoid paying tax. Therefore, we aim to examine whether taxes still affect earning persistence in an era of prevalent digital information. For that purpose, we use book–tax differences considering the deductible temporary differences and the taxable temporary differences. In addition, we analyze which of the two earnings components are more affected by taxes, specifically cash flow or accruals. We estimate econometric regressions using panel data to test our hypotheses. Through a sample of 421 small- and medium-sized (SME) Portuguese firms, between 2016 and 2020, we found empirical evidence that earning persistence tends to be lower when deductible temporary differences increase, while taxable temporary differences produce no statically significant effect. Furthermore, our results suggest that cash flow component increases more earning persistence than accruals. Therefore, deductible temporary difference may be an indicator of earnings management activities in these firms. These results are relevant, given the potential negative consequences of earnings management for the efficient decision making of stakeholders and even more because SMEs represent a substantial number of firms in European countries, particularly in Portugal.

Keywords: earning persistence; book–tax differences; accruals; cash flows (search for similar items in EconPapers)
JEL-codes: L M M0 M1 M10 M11 M12 M14 M15 M16 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2076-3387/13/2/48/pdf (application/pdf)
https://www.mdpi.com/2076-3387/13/2/48/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jadmsc:v:13:y:2023:i:2:p:48-:d:1060191

Access Statistics for this article

Administrative Sciences is currently edited by Ms. Nancy Ma

More articles in Administrative Sciences from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().