When do book–tax differences matter for earnings persistence? The role of sales decline

This study examines the association between book-tax differences (BTDs), sales decline, and earnings persistence among non-financial listed firms in Vietnam. Adopting a conditional perspective, the study treats BTDs as observable signals of accounting-tax divergence, reporting environments, and transitory earnings components, while sales decline is conceptualized as an adverse operating state that may weaken the association between current and future earnings. Using a balanced panel of 325 firms from 2013 to 2023, comprising 3,575 firm-year observations, earnings persistence is measured through the association between current and one-year-ahead pre-tax book income. Earnings are further decomposed into operating cash flows and accruals to examine component-level persistence. The empirical analysis uses OLS regressions with industry and year fixed effects and firm-clustered standard errors. Additional analyses control for earnings management and tax avoidance and test the robustness of the findings using a continuous measure of sales decline, a sample excluding the COVID-19 period, and an alternative annual-decile classification of large BTDs. The results show that pre-tax book income is persistent, but its persistence is significantly lower during periods of sales decline. The evidence for BTDs is asymmetric: large positive BTDs are more consistently associated with lower earnings persistence, whereas the evidence for large negative BTDs varies across model specifications and earnings components. The three-way interactions among sales decline, BTD classifications, and current earnings are not statistically significant in the main analyses, indicating that the evidence does not support a broad BTD-specific amplification mechanism. Overall, the findings suggest that earnings persistence is shaped by earnings components, accounting-tax reporting signals, and operating conditions. The study highlights the importance of interpreting BTDs jointly with sales trends and earnings components in the Vietnamese institutional setting.