The purpose of this paper is to verify the usefulness of Deferred Taxes Accounting, and to examine if the deferred taxes accounting information has the value relevance or not.
Samples are chosen among manufacturing companies (except financial companies) listed in the period from 2004 to 2006 of which the fiscal year is 31 December.
This study uses the Ohlson model to prove whether the earnings that reflect deferred taxes or those that do not reflect deferred taxes provides more useful accounting information. Also, it proves whether the accounting information in the case of deferred taxes explains the stock price better in KSE (Korea Stock Exchange) than KOSDAQ (KOrea Security Dealers Association Quotation ).
The study analyzes net deferred taxes through cross sectional analysis of publicly traded firms to determine whether accounting for deferred taxes data are value-relevant. The sample consists of 2,865 non-banking firms with December fiscal year end on 2004-2006.
The results of the study are as follows.
First, there was no significant difference in the explanatory power of the two models depending on whether EPS and BPS are adjusted to deferred taxes or not. In addition, the stock price was more sensitive to the change of EPS than that of BPS.
Second, the KSE is a little more sensitive to the change of EPS and BPS, but there is no big difference between the KSE and the KOSDAQ. That is, the value relevance of deferred taxes accounting is not a little more informative in KSE than KOSDAQ. This result does not imply that deferred taxes accounting should be out of use. Maybe there is the possibility that this result is cause by the internal characteristics of the Ohlson model.
These results don't show earnings that reflect deferred taxes has an additional informational implication in stock market.
However, this study has some limits.
First, the interpretation of this study has some cautions by lack of resources.
Second, this study uses the basic model of Ohlson without extra variables introduced. So some expended models that combine some more control variables(size, leverage, risk, etc) are warranted in the future researches.