Deferred Taxes and Cost of Debt: Evidence from Japan

Abstract

This paper investigates the information content of deferred taxes in the Japanese debt market. We find that net deferred tax assets are negatively associated with cost of debt. Moreover, we find that deferred tax liabilities are positively associated with cost of debt but deferred tax assets are not. This evidence may reflect that it is more probable that tax obligation will arise than the tax benefits will realize. Additionally, we find no evidence that deferred tax assets caused by temporary differences and deferred liabilities are significantly different with respect to their impact on cost of debt. These results suggest that debt investors in the Japanese debt market value the various components of deferred tax assets differently.