The effect of book-tax differences on earnings quality: an empirical study in Vietnam

Purpose This study aims to explore the impact of book-tax differences (BTDs) on earnings quality, focusing on earnings persistence and informativeness. Additionally, it investigates whether this impact varies across three distinct periods: before, during and after COVID-19. Design/methodology/approach We employ Feasible Generalized Least Squares estimation on panel data, with a sample comprising 625 companies listed on the Vietnamese stock market between 2016 and 2023. Findings The results reveal that BTDs negatively affect earnings persistence and informativeness. Specifically, BTDs make current earnings less persistent, diminishing their ability to predict future cash flows and, consequently, reducing earnings informativeness. Moreover, when analyzing the effect of BTDs on earnings components, the study finds that, both before and after COVID-19, BTDs negatively affect these components. However, the negative effect was limited to the accrual component during the pandemic. While large positive BTDs negatively impact the cash flow component, interestingly, large negative BTDs did not affect the cash flow component during this period. Research limitations/implications This study has several limitations, including its focus on the Vietnamese context. Future research could broaden the scope by examining other countries with varying accounting and tax regulations. Additionally, the findings reveal a negative but statistically insignificant impact of large negative BTDs on cash flow persistence during economic crises, particularly the COVID-19 period. Practical implications These findings offer valuable insights into the quality of earnings, providing stakeholders with crucial information for decision-making. Originality/value This is the first study in the Vietnamese context to emphasize the impact of BTDs on cash flow persistence and earnings informativeness. Additionally, it explores how BTDs affect earnings quality across distinct periods – before, during, and after the COVID-19 pandemic.