ESG and Deferred Tax Assets

Purpose: Following the adoption of K-IFRS in 2011, prior studies have reported that the degree of discretionary recognition of the realizability of deferred tax assets within firms has relatively increased. In addition, it has been observed that firms with a higher concentration of managerial power in their CEOs tend to show a higher degree of discretionary recognition of deferred tax assets’ realizability. Building on this stream of research, the present study focuses on the relationship between firms’ ESG levels– reflecting their commitment to ethical management –and the degree of discretionary recognition of the realizability of deferred tax assets. Research design, data, and methodology: This study examines the relationship between firms’ ESG levels and the degree of discretionary recognition of the realizability of deferred tax assets using a sample of 1,751 firm-year observations from 2016 to 2019. Results: The results are summarized as follows: First, firms with higher ESG levels tend to exhibit a lower degree of discretionary recognition regarding the realizability of deferred tax assets. Second, firms with stronger corporate governance are associated with a lower degree of discretionary recognition regarding the realizability of deferred tax assets. These findings suggest that firms committed to ethical management, as indicated by high ESG levels, maintain a relatively conservative stance in the discretionary recognition of the realizability of deferred tax assets. Implications: This study contributes by empirically examining the relationship between ESG performance and the discretionary recognition of deferred tax assets in an environment where the criteria for recognizing the realizability of deferred tax assets have been relaxed following the 2011 K-IFRS adoption. The findings are expected to enhance our understanding of how ethical management influences financial reporting transparency and reliability.