This paper provides the first value relevance analysis of deferred tax disclosures under IFRS/IAS. The comprehensive analysis, taking into account the different deferred tax components, shows that investors generally do not consider deferred taxes to convey relevant information for assessing firm value, with the exception being large net deferred tax assets. In order to examine whether the general value irrelevance of deferred tax information may be due to lacking cash flow implications, the value relevance analysis is complemented by an analysis of deferred tax balance reversal. This supplemental analysis reveals that about 70 percent of the deferred tax balance persists over time, with increasing accounts dominating decreasing accounts over a four-year horizon, and that deferred tax assets are more reversing than deferred tax liabilities. Further, quantifications reveal that the majority of balance reversals have rather negligible cash flow implications.
PurposeIn contrast to common literature that suggests that trade credit is an extremely expensive source of financing with annual interest rates exceeding 40 percent, this paper seeks to argue that the average interest rate of trade credit does not exceed the cost of alternative funds, thereby explaining why trade credit constitutes a substantial part of the optimal financing mix of large, liquid, and capital market listed firms.Design/methodology/approachBesides providing a formula for estimating a firm's actual trade credit interest rate, this paper is mainly based on a descriptive analysis of trade credit use as well as on survey results of a broad range of prior studies.FindingsThe paper finds that highly liquid firms use substantial amounts of trade credit, thus indicating that trade credit use per se cannot be as expensive as literature supposes. In line, estimated average interest rates are about 4 to 6 percent.Originality/valueBy arguing that actual cost of trade credit use is far from being as high as literature supposes, this paper provides important implications for optimal short‐term financing strategies as well as for the assessment of trade credit use in credit worthiness analyses.
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