Next, we look at Column E, which reports the coefficients for all 41 specific BTDs. Eleven of the 14 temporary differences relating to accrual quality (i.e., AQ BTD) are negative, which is more than would be expected by chance. Four (BENEFITS, MTM, PPE and REV) are significantly less from zero. BENEFITS includes book-tax differences relating to compensation, including stock compensation, compensated absences, and health-care costs. MTM includes BTDs arising from the use of mark-to-market for book, but not tax, purposes. PPE includes the differences between book and tax depreciation, as well as differences related to interest capitalization and asset impairments. REV includes differences between book and tax related to the timing of revenue recognition. The significant negative coefficient on REV is perhaps the most interesting finding. This would suggest that as managers use their discretion in timing revenue recognition for book purposes, it is reflected in the book-tax differences and results in lower persistence. Similarly, the finding that book-tax differences related to PPE are associated with persistence is consistent with firms using the considerable discretion that is afforded to them under GAAP to report asset impairments. The result on BENEFITS suggests that, as compensation expenses outpace compensation deductions (e.g., for accrued vacation pay or stock option expenses), earnings persistence decreases. This may relate to discretion in accelerating expenses to create a big bath or may be a mechanical relation due to the accounting for option compensation. The significant result for MTM is a little surprising since many market adjustments are reported through other comprehensive income, as opposed to net income. However, some of these adjustments are reported through net income (e.g., adjustments related to trading securities and any adjustments made using the fair value option) and thus, these results are consistent, once again, with the accrual quality story.
All reconciling are presented in dollars of income, calculated as the effect on the effective tax rate multiplied by income before taxes and divided by the statutory tax rate. The categories are: ADJRET: provision to tax return adjustments, adjustment of deferred taxes due to changes in rates or laws, change in the valuation allowance. AMORT-GW: amortization and impairments of goodwill; effect of non-deductible goodwill; negative goodwill amortization; purchase accounting adjustments. AMORT-OTH: amortization of intangible assets; nondeductible amortization; includes acquired purchased in-process research and development. AUDIT: audit resolutions and settlements; adjustments of tax reserves or prior year adjustments; FIN 48 and other tax contingencies. COLI: company-owned life insurance. CREDITS-r: all credits including state, foreign, investment, and alternative minimum tax; credit carryforwards; expiration of credits. DIVS: non-taxable dividends, including dividends-received deduction. DMD: domestic production activities deduction. ETI: benefits of FSC and ETI. FOR-r: effects of foreign rates higher or lower than U.S. statutory rate; currency translation adjustments; foreign tax holidays; foreign withholding tax. M&A-r: merger costs, Gains/losses on the sale or disposal of subsidiaries, restructuring charges. MININT: minority interest. OTHER-r: line items too vague to categorize (e.g., “nondeductible expenses”); includes items which are partially but not fully categorizable (e.g., nondeductible goodwill and other). REG-r: items unique to regulated entities. REPAT: effects of repatriating foreign income. STATERATE: effects of U.S. state income tax rates. SUB-r: equity earnings in affiliates; gain on subsidiary IPO; consolidation differences; write-downs of equity investments, permanent items flowed-through from subsidiaries. TEI: interest and dividends. UNUSUAL-r: all line items not included in another category. They are material enough to warrant separate disclosure for that firm but occur too infrequently in the sample to warrant a separate category.