Does Book-Tax Difference Influence the Value Relevance of Book Income? Empirical Evidence from Japan

This paper analyzes the effects of the book-tax difference (BTD) on accounting accruals and value relevance. Recent studies argued that book-tax conformity increases earnings quality. However, other studies argued that book-tax conformity decreases earnings quality. The previous studies failed to isolate the components of BTD, and they did not consider the design of the operation of accounting or tax systems, which is the reason for the conflicting results. This paper isolates the elements of BTD and compares these elements and similar items. In addition, this paper focuses on the timing of changing accounting and tax systems. We predict and find that (1) large discretionary book-only accruals (DBOA) reduce the value relevance of earnings, (2) the value relevance of firms with large non-discretionary book-only accruals (NBOA) are higher than other firms. However, this result is not clear from a comparison of the value relevance of firms with large non-discretionary book-tax accruals (NBTA), and (3) the relationship between BTD and value relevance depends on the accounting system and the taxation system.