Market reaction to earnings management via deferred tax

Tan, Zhi En. (2009). Market reaction to earnings management via deferred tax Honours Thesis, School of Business, The University of Queensland.

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Author Tan, Zhi En.
Thesis Title Market reaction to earnings management via deferred tax
School, Centre or Institute School of Business
Institution The University of Queensland
Publication date 2009
Thesis type Honours Thesis
Total pages 93
Language eng
Subjects 14 Economics
Formatted abstract
This study investigates the market reaction to firms that meet analysts' forecasts through earnings management by recognising deferred tax assets. Prior studies find evidence of firms recognising deferred taxes opportunistically to meet analysts' forecasts in Australia. As documented, firms that meet analysts' forecasts will be given a premium relative to firms that do not meet the benchmark. However, previous studies provide contradictory results on the market's perception of earnings management as a whole, whilst little research has been done on how the market perceives the strategic use of specific tax accruals to manage earnings. This study uses an events study approach to analyse the stock price reaction to earnings announcements of firms that are likely recognising deferred tax assets to meet analysts' earnings forecasts. The results indicate that, on average, over the short-term, the market rewards firms on the basis of meeting analysts' forecasts of earnings after tax. Over the medium-term, results suggest an underperformance for firms that miss the analysts' forecast of pre-tax earnings but meet or beat the after tax forecasts. However, this underperformance is not significant for firms that bring deferred tax assets to account in the period. These results have important implications for managers and regulators with respect to recognising deferred tax assets opportunistically to meet analysts' forecasts.

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Created: Thu, 28 Oct 2010, 09:06:11 EST by Ning Jing on behalf of The University of Queensland Library