Market prices are obtained from Thomson Reuters’ Datastream database, accounting data from Thomson Reuters’ Worldscope database, while deferred tax data, being not available in the databases, are hand-collected from the notes to consolidated financial statements. Hand- collected data are matched with the database data by using firm name and year. The match is validated by total assets and net income.43
The observation period covers fiscal years 2005 to 2008. 2005 is chosen as starting point because the adoption of IFRS for consolidated financial statements became mandatory for all listed European companies for fiscal years beginning at or after January 1, 2005.
Before 2005, listed German companies were allowed to prepare their consolidated financial statements according to either German GAAP (HGB), IFRS, or US GAAP. To ensure consistent reporting rules, 2005 is hence chosen as the first observation year.
Given that deferred tax data have to be hand-collected, the sample has to be restricted to a manageable size. Therefore, the initial sample consists of all 160 firms that compose the indices DAX, MDAX, TecDAX, and SDAX, and additional 50 firms listed in CDAX index
42 The Hausman test rejects the null hypothesis of unobserved heterogeneity being uncorrelated with the regressors. Hence, random effects estimation would generate inconsistent coefficient estimates and, thus, I use fixed effects estimation.
43 For 14 observations, database data did not correspond to the hand-collected data, so that I replaced the database data by hand-collected data for these observations. Results are unchanged if these observations are dropped.
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Table II.2 - Sample Selection
Firms Observations
DAX 30
MDAX 50
TecDAX 30
SDAX 50
other CDAX 50
210 excluded:
firms without legal domicile in Germany -11 banks, insurance companies, REITs
(NACE 1.1 codes 6500-6799) -15
184 736
missing variable data for the basic regression -79
outliers -1 -31
Total 183 626
on August 31, 2007; all in all, the 210 firms with the highest free float market capitalization and exchange turnover on Frankfurt Stock Exchange in August 2007.44 I exclude 11 firms without legal domicile in Germany, and 15 banks, insurance companies, and real estate investment trusts (NACE 1.1 codes 6500–6799) because of their different economic and financial regulatory environment, the difficulty of separating their financial assets from operating assets, their different asset composition, and their tax specificities. This leaves the sample with 184 firms and 736 firm-year observations. I lose 79 observations due to variable construction and missing variable data.45 To minimize the effects of outliers on the inferences, I delete another 31 observations with an absolute value of the R-Student statistic of greater
44 Including the shares of all listed domestic companies, the CDAX index represents the German equity market in its entirety, i.e., all companies listed on FWB Frankfurter Wertpapierbửrse (Frankfurt Stock Exchange). The indices DAX, MDAX, TecDAX, and SDAX are subsets of the CDAX, containing the largest companies in terms of order book volume and free float market capitalization. These firms are chosen for the analysis because they are, on average, larger, more diversified, and more involved in international activities than the remainder of German firms, which may give rise to more significant deferred taxes from different sources. Mills et al. (2002), for instance, report that the largest 20 percent of their sample firms account for virtually all of their sample’s book-tax income and balance sheet differences. For further information on the indices, see deutsche-boerse.com.
The strike date August 31, 2007, is chosen randomly.
45 For not losing the first observation year, 2005, as a consequence of the construction of abnormal operating earnings, AOE, including lagged net operating assets, I additionally collected the data necessary to compute net operating assets from all sample firms that already prepared consolidated financial statements according to IFRS
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43
© American Accounting Association
than three.46 This results in a final sample of 183 firms and 626 firm-year observations over fiscal years 2005 to 2008. Table II.2 summarizes the sample selection procedure and Table II.3 reveals the sample’s industry composition.
Table II.3 – Industry Composition
Industry Number of
Firms
NACE 1.1
Manufacturing 114
Apparel & Leather Products 6 1800-1999
Automobile 8 3400-3599
Basic Resources 4 2500-2799
Chemicals 14 2400-2439, 2450-2499
Food & Beverages 1 1500-1599
Industrial & Technology 65 2800-3399
Pharmaceuticals 16 2440-2449, 7310
Business & Management Consultancy, Personel Services, Investment
Consultancy, Holdings 12 7400-7499
Construction 5 4500-4599
Healthcare 1 8500-8599
Media 7 2200-2299, 9200-9299
Real Estate 8 7000-7099
Software 12 7200-7299
Telecommunication 4 6400-6499
Transportation & Logistics 6 6000-6399
Utilities 3 4000-4199
Wholesale & Retail 11 5100-5299
Total 183
46 The R-Student statistic is measured as the regression residual divided by the residuals’ standard error. A cutoff of three is commonly used and implies that observations with a regression residual farther than three standard deviations from zero are considered as outliers.
II – Value Relevance of Deferred Taxes