The relationship between book-tax differences and earnings growth within Indonesian manufacturing firms

Abstract

Previous studies have investigated the relationship between book-tax differences and earnings growth. However, prior studies provide mix results pertaining to the relationship between these two constructs. This study investigates the relationship between book-tax differences and earnings growth within manufacturing firms in Indonesia. In this study, book-tax differences were measured by two different components; i.e., permanent differences and temporary differences, while earnings growth was measured by changes in pretax income and changes in net income. Meanwhile, size of firm, return on asset, operating cash flows and accrual income served as control variables. The sample of this study comprises of manufacturing companies listed on the Indonesia Stock Exchange (IDX) for the years 2010 - 2014. This study focuses on listed companies from manufacturing industry to reduce the effect of industry differences. The criteria applied in the sample selection: the targeted sample is non-regulated companies and is listed IDX in 2010 – 2014, yielding a sample of 390 firm-year observations from the fiscal years 2010 to 2014. The results show that permanent book-tax difference is positively and significantly associated with change of pre-tax income, while temporary book-tax difference is negatively and significantly related to change of pre-tax income. The results further indicate that permanent book-tax difference is positively and significantly associated with change of net income, while temporary book-tax difference is negatively and significantly related to change of pre-tax income.

Keywords: book-tax differences, earning growth, Indonesian manufacturing firms