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Abstract:
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This study investigates the determinants and effects of voluntary book -tax
difference (BTD ) disclosures in earnings releases . Unlike prior studies , I find no
evidence that managers are more likely to voluntarily disclose BTD information when
firms have low earnings quality . I also find that managers are more likely to disclose
BTD information when firms have large negative but not large positive BTDs . Because
BTDs are particularly informative when earnings quality is low and when book income
significantly exceeds taxable income (i .e . , large positive BTDs ) , these results suggest that
managers selectively disclose BTD information in earnings releases . Interestingly , I also
find that managers are more willing to disclose BTD information when tax avoidance
activities are high . This result suggests that managers are willing to bear some taxrelated
disclosure costs to reassure investors that BTDs are not due to aggressive
financial reporting . Prior research provides evidence of a systematic association between BTDs
computed using required 10 -K tax disclosures and future forecast errors and stock
returns . I provide evidence that voluntary BTD disclosures attenuate the association
between BTDs and future forecast errors . I also provide limited evidence that voluntary
BTD disclosures attenuate the association between BTDs and future stock returns . These
results suggest that voluntary BTD disclosures help analysts and investors impound BTD
information into earnings forecasts and stock prices . |