When Profits Lie: How Book-Tax Differences Signal Declining Firm Performance
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Many firms report significant differences between accounting profits and taxable income, which can mislead investors, creditors, and regulators about the firm’s true financial health. These book-tax differences often result from earnings management or aggressive tax strategies, creating financial, operational, and reputational risks. Over time, such discrepancies can undermine investor confidence, reduce profitability, and limit a firm’s long-term growth and sustainability. Hence, the study examined the effect of book-tax differences on the performance (proxy by return on asset) of listed manufacturing firms in Nigeria. An ex-post facto research design was adopted, covering a population of 70 listed manufacturing firms, from which a purposive sample of 53 firms was selected for the period 2014 to 2024. Secondary data were obtained from audited financial statements and annual reports of the sampled firms. The hypothesis was tested using a fixed effects model, selected after the Hausman specification test at a 1% significance level. The finding revealed that book-tax differences have a negative and statistically significant effect on firm performance (β = -0.303162, p = 0.0000), leading to the conclusion that larger discrepancies between accounting and taxable income reduce profitability and weaken the financial sustainability of manufacturing firms in Nigeria. Therefore, financial managers and chief accountants of listed manufacturing firms should implement more rigorous internal monitoring and reconciliation procedures between accounting income and taxable income by regularly analyzing and minimizing unnecessary discrepancies in order to ensure that reported profits accurately reflect operational performance, reduce potential risks associated with aggressive tax planning or earnings management.
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