Large Book-Tax Differences, Bankruptcy and Firm Efficiency

Abstract

In this study, I investigate the relationship between large book-tax differences (BTDs) and the probability of firm bankruptcy and financial distress. I argue that large BTDs provide valuable information regarding corporate bankruptcy. Using the Altman Z-score and Ohlson O-score models, I find that firms with large negative BTDs (LNBTDs) are less likely to experience financial difficulty and bankruptcy. In contrast, firms with large positive BTDs (LPBTDs) show a higher likelihood of financial distress and bankruptcy. Additionally, the LNBTD subset, contrary to the LPBTD group, demonstrates higher firm efficiency.