Uncertain Tax Benefits and the Persistence of Earnings




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I examine the relationship between uncertain tax benefit accruals (UTB accruals) and earnings persistence. I posit that the two competing forces that make up UTB accruals could lead to no relationship between UTB accruals and earnings persistence. Specifically, I argue that UTB accruals could be informative about R&D and capital expenditure investments, and therefore, UTB accruals could be positively related to earnings persistence. On the other hand, UTB accruals could represent accrual errors – that is, the uncertainty of tax positions – and therefore, UTB accruals could be negatively related to earnings persistence. Consistent with these two competing forces, I find that the relationship between UTB accruals and earnings persistence is non-linear. In particular, I find that the earnings persistence is the highest for firms with no UTB accruals compared to those with non-zero UTB accruals – the tax positions do not involve uncertainty, and therefore, earnings persistence is highest. I find that earnings persistence is higher for large positive UTB accruals than large negative UTB accruals, suggesting that large positive UTB accruals provide information on investments, while large negative UTB accruals represent accrual estimation errors. Collectively, these findings show that UTB accruals exhibit properties of both being informative and having accrual estimation errors, and thus, future research should consider these properties separately when examining UTB accruals and managerial opportunism.



Income tax, Income tax--United States--Accounting, Corporations--Taxation, Corporate profits, Earnings management