Decomposing Changes in Deferred Tax Assets and Liabilities to Isolate Earnings Management Activities

  • Phillips J
  • Pincus M
  • Rego S
 et al. 
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Phillips et al.(PPRW) investigate whether changes in eight components of net deferred tax liabilities can be used to identify firms that manage earnings to avoid earnings declines. PPRW extend existing literature that examines whether deferred tax expense can be used to detect earnings management by collecting detailed information about accounts that affect the net deferred tax liability (and deferred tax expense) to identify specific components of the net deferred tax liability that predict whether firms manage earnings. The paper investigates this issue by estimating a system of equations that simultaneously determines a firm's earnings management classification and eight components of the net deferred tax liability. The study contributes to the literature that examines the usefulness of book-tax differences and deferred tax expense in identifying earnings management by investigating the effect of the components of changes in net deferred tax liabilities on the probability that a firm manages earnings.

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  • John D. Phillips

  • Morton P.K. Pincus

  • Sonja O. Rego

  • Huishan Wan

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