Measurement of Effective Corporate Tax Rates Using Financial Statement Information.

A number of empirical studies have used effective tax rate (ETA) measures calculated from financial statement information to examine the relations between taxes, firm decisions, and firm characteristics. This study investigates two issues relating to the use of ETRs: (1) the potential for defensible alternative measures to provide different results, and (2) the problems associated with using financial statement information to estimate tax and income. Our results indicate that alternative ETR measures and systematic deferred tax reporting differences in the financial statements cause notable shifts in estimated ETRs. The systematic deferred tax differences have a predictable directional effect on estimated ETRs. In addition, this effect is not cancelled when comparisons between deferred tax reporting groups are made. In light of these results, researchers should evaluate the robustness of their results across alternative ETR measures. Our results also suggest that systematic differences in the financial reporting of deferred tax liabilities are related to firm-size. Use of the deferred tax expense amount rather than the change in the long-term deferred tax liability in the ETA measure should alleviate this problem across alternative ETA measures.