Earnings and firm value: the moderating impact of large deferred taxes and large accruals in Indonesia


Deferred tax and accruals have the characteristic of causing reported earnings to be above or below normal. Both are permitted to be used by companies in financial reporting. This study examines whether large deferred taxes and large accruals have an impact on the relationship between earnings and firm value. Using a sample that includes 1938 company-year observations for the 2007−2017 periods listed on the Indonesia Stock Exchange (IDX), this study found that large positive deferred taxes with large positive accruals had weakened the relationship between earnings and firm value. In contrast to these results, a large negative deferred tax with a large negative accrual does not have an impact on the relationship between earnings and the firm value. This finding suggests that “liberal” accounting policies that cause reported “above normal” earnings have a negative effect on the association between earnings and firm value. However, “below normal” earnings resulting from “conservative” accounting policies do not affect the association between earnings and firm value. The uniqueness of this study is the incorporation of deferred taxes with accruals with variations in the form of positive versus negative and large versus small. The findings imply that the presentation of financial information with small deferred taxes and small accruals is more beneficial for investors compared to financial information with large positive deferred taxes and large positive accruals. However, results of this study indicate that large negative deferred taxes and large negative accruals, indicating conservative accounting, are not responded differently by investors.

Keyword : earnings, firm value, Tobin’s Q, deferred tax, accruals, Indonesia Stock Exchange (IDX)

How to Cite
Sutopo, B., Adiati, A. K., & Siddi, P. (2021). Earnings and firm value: the moderating impact of large deferred taxes and large accruals in Indonesia. Business: Theory and Practice, 22(2), 241-248.
Published in Issue
Aug 25, 2021
Abstract Views
PDF Downloads
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.


Adegboye, A., Ojeka, S., Adegboye, K., Ebuzor, E., & Samson, D. (2019). Firm performance and condensed corporate governance mechanism: Evidence of Nigerian financial institutions. Business: Theory and Practice, 20, 403–416.

Adiati, A. K., Rahmawati, & Bandi. (2018). Does disclosure method of deferred tax matter for investors in stock valuation based on earnings? International Journal of Business and Society, 19, 676–688.

Akbar, S., Shah, S. Z. A., & Stark, A. W. (2011). The value relevance of cash flows, current accruals, and non-current accruals in the UK. International Review of Financial Analysis, 20(5), 311–319.

Bauman, M. P., & Shaw, K. W. (2016). Balance sheet classification and the valuation of deferred taxes. Research in Accounting Regulation, 28(2), 77–85.

Blaylock, B., Shevlin, T., & Wilson, R. J. (2012). Tax avoidance, large positive temporary book-tax differences, and earnings persistence. The Accounting Review, 87(1), 91–120.

Buchanan, B., Cao, C. X., & Chen, C. (2018). Corporate social responsibility, firm value, and influential institutional ownership. Journal of Corporate Finance, 52, 73–95.

Callao, S., Cimini, R., & Jarne, J. I. (2016). Value relevance of accounting figures in presence of earnings management. Are enforcement and ownership diffusion really enough? Journal of Business Economics and Management, 17(6), 1286–1299.

Chang, L. L., Hsiao, F. D., & Tsai, Y. C. (2013). Earnings, institutional investors, tax avoidance, and firm value: Evidence from Taiwan. Journal of International Accounting, Auditing and Taxation, 22(2), 98–108.

Chen, A., & Gong, J. J. (2019). Accounting comparability, financial reporting quality, and the pricing of accruals. Advances in Accounting, 45.

Eyring, H., & Narayanan, V. G. (2018). Performance effects of setting a high reference point for peer-performance comparison. Journal of Accounting Research, 56(2), 581–615.

Farooq, O., Bakhadirov, M., & Ahmed, N. (2020). Geographic variation in religiosity and its impact of dividend policies. Asian Academy of Management Journal of Accounting and Finance, 16(1), 109–125.

Hanlon, D., Navissi, F., & Soepriyanto, G. (2014). The value relevance of deferred tax attributed to asset revaluations. Journal of Contemporary Accounting and Economics, 10(2), 87–99.

Hanlon, M., & Shevlin, T. (2005). Book-tax conformity for corporation income: an introduction to the issues. Tax Policy and the Economy, 19, 101−134.

Hossain, A., & Nguyen, D. (2016). Capital structure, firm performance and the recent financial crisis. Journal of Accounting and Finance, 16(1), 76–89.

Kantšukov, M., & Sander, P. (2018). A lesson in valuation from Estonia: The difference between the fundamental value of equity under distributed and traditional profit taxation systems. Business: Theory and Practice, 19, 146–156.

Kasipillai, J., & Mahenthiran, S. (2013). Deferred taxes, earnings management, and corporate governance: Malaysian evidence. Journal of Contemporary Accounting and Economics, 9(1), 1–18.

Khaoula, F., & Moez, D. (2019). The moderating effect of the board of directors on firm value and tax planning: Evidence from European listed firms. Borsa Istanbul Review, 19(4), 331–343.

Kousenidis, D. V., Ladas, A. C., & Negakis, C. I. (2009). Value relevance of conservative and non-conservative accounting information. International Journal of Accounting, 44(3), 219–238.

Lee, N. (2019). R & D accounting treatment, firm performance, and market value: Biotech firms case study. Journal of International Studies, 12(2), 66–81.

Lewellen, J., & Resutek, R. J. (2019). Why do accruals predict earnings? Journal of Accounting and Economics, 67(2–3), 336–356.

Li, V. (2019). The effect of real earnings management on the persistence and informativeness of earnings. The British Accounting Review, 51, 402–423.

Loh, L., Thomas, T., & Wang, Y. (2017). Sustainability reporting and firm value: Evidence from Singapore-listed companies. Sustainability (Switzerland), 9(11), 1–12.

Martins, M. M., & Lopes, I. T. (2016). Intellectual capital and profitability: A firm value approach in the European companies. Business: Theory and Practice, 17(3), 234–242.

Mbugua, C. M., Oluoch, J. O., & Ndambiri, A. N. (2018). Determinants of firm value of securities for companies that had issued initial public offering. The Strategic Journal of Business & Change Management, 5(2), 769–787.

Moreira, J. C. C., Lima, G. A. S. F., & Góis, A. D. (2019). Effects of institutional factors on the accruals anomaly in Latin America. Journal of International Accounting, Auditing and Taxation, 36.

Nazir, M. S., & Afza, T. (2018). Does managerial behavior of managing earnings mitigate the relationship between corporate governance and firm value? Evidence from an emerging market. Future Business Journal, 4(1), 139–156.

Ni, Y., Huang, P., Chiang, P., & Liao, Y. (2019). Cash flow statements and firm value: Evidence from Taiwan. Quarterly Review of Economics and Finance, 71, 280–290.

Osazuwa, N. P., & Che-ahmad, A. (2016). The moderating effect of profitability and leverage on the relationship between eco-efficiency and firm value in publicly traded Malaysian firms. Social Responsibility Journal, 12(2), 295–306.

Penman, S. H. (2013). Financial statement analysis and security valuation (5h ed.). McGraw-Hill.

Phillips, J., & Pincus, M. (2003). Earning management: New evidence based on deferred tax expense. The Accounting Review, 78(2), 492–521.

Prabowo, R., Hooghiemstra, R., & Van Veen-Dirks, P. (2018). State ownership, socio-political factors, and labor cost stickiness. European Accounting Review, 27(4), 771–796.

Qu, X., & Zhang, G. (2015). Value-relevance of earnings and book value over the institutional transition in China: The suitability of fair value accounting in this emerging market. International Journal of Accounting, 50(2), 195–223.

Samara, A. D. (2014). Assessing the relevance of deferred tax items: Evidence from loss firms during the financial crisis. The Journal of Economic Asymmetries, 11, 138–145.

Scott, W. R. (2015). Financial accounting theory (7th ed.). Pearson Canada Inc.

Shan, Y. G. (2015). Value relevance, earnings management and corporate governance in China. Emerging Markets Review, 23, 186–207.

Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings. The Accounting Review, 71(3), 289–315.

Spence, M. (1973). Job market signaling. The Quarterly Journal of Economics, 87(3), 355–374.

Sutopo, B., & Hananto, S. T. (2019). Profitability and firm value: the impact of non-cash value flow recorded in the financial statements. International Journal of Economic Policy in Emerging Economies, 12(5), 490–502.

Tang, T. Y. H., & Firth, M. (2012). Earnings persistence and stock market reactions to the different information in book-tax differences: evidence from China. International Journal of Accounting, 47(3), 369–397.

Tikk, J. (2010). Accounting changes in the public sector in Estonia. Business: Theory and Practice, 11(1), 77–85.

Wang, L. (2019). Do investors care about earnings quality? The case of Chinese reverse mergers. Pacific Basin Finance Journal, 55(February), 82–94.