Book-Tax Differences,Earnings Management And Cost Of Equity Capital

Because of the mode of accounting and tax law separation,the existence of book-tax differences(BTD)is objective.BTD give opportunities for managers to manage earnings and managers can increase revenues and reduce costs by manipulating non-taxable items.Therefore,we think BTD can capture the profit manipulation of the management,reflecting the company's earnings quality.In principal-agent relationships,because of asymmetric information and the different interests in owners and managers,managers often use some means of earnings management which are not easy to be identified.Thus,there is a distortion problem of disclosed financial statements.Investors will focus on companies' information timely,in particular,earnings information,whose accuracy will directly influence investors'investment risks and indirectly affect investment return rate(the cost of equity capital).This paper draws on the related research about BTD and earnings management level,based on the analysis of the association between BTD and earnings management level,then this paper further researches the effect of earnings management level on cost of equity capital and explores whether earnings management plays a mediating role in the relationship between BTD and cost of equity capital.We classify BTD into temporary BTD and permanent BTD.This paper conducts an empirical research.Empirical results of our study are as follows.First,temporary BTD and discretionary accruals show a significant positive(+)association,which means that temporary BTD include information about earnings management.Second,there is a significant positive(+)association between temporary BTD and cost of equity capital,which suggests that investors can identify the incremental information included in temporary BTD and this awareness will be reflected on the expected rate of return.Third,earnings management level plays a mediating role to some extent in the association between temporary BTD and cost of equity capital.