Accounting quality deferred tax and risk in the banking industry

This study attempts to provide evidence of the relation between capital structure, stock crash-risk and deferred taxation. Using a sample of banks domiciled in Eurozone countries and stock crash risk measures that capture both medium and extreme risk, the study shows that the recording of deferred tax components leads, in some instances, related to capital structure, to future stock crash risk. Further investigation reveals that this result is incrementally driven by banks domiciled in southern Europe. Moreover, controlling for the existence of profitability based on the prescriptions of International Accounting Standard (IAS) 12 for the recording of deferred tax assets, the study shows that banks with high deferred tax assets domiciled in crisis-affected countries have lower future stock crash risk. In this respect, these results likely imply that recording deferred tax in a manner better reflecting the provisions of accounting standards may not increase the likelihood of a future stock crash. However, for banks with capital-structure problems domiciled in crisis-affected countries, high deferred tax assets lead to higher likelihood of future crash risk.