Taxable Income, emerging Earnings, and Equity Values
Baruch Lev New York University Doron Nissim Columbia University
ABSTRACT: We investigate the cleverness of a revenue enhancement revenue-based perfectâ€"the ratio of taxto-book incomeâ€"to predict earnings outgrowth and stock returns and to explain the earnings-price ratio. This tax fundamental re?ects two temporary and permanent book-tax differences as well as tax accruals, such as changes in the tax valuation allowance. We ?nd that the tax-to-book income ratio predicts subsequent ?ve-year earnings changes, both beforehand and subsequently the implementation of Statement of Financial Accounting Standards (SFAS) No. 109 in 1993. For the pre-SFAS No. 109 period, the tax randomness is un colligate to contemporaneous earnings-price ratios and powerfully related to subsequent stock returns. Conversely, for the post-SFAS No. 109 period, the tax fundamental is strongly related to contemporaneous earnings-price ratios and only weakly related to subsequent stock returns, indicating improvement over time in investors perceptions of the implications of the tax information for future earnings.
Deferred taxes, a component of our tax fundamental and the focus of recent research, exhibits relatively modest might to predict earnings or stock returns both before and after the implementation of SFAS No. 109. Finally, throughout the examined period, the taxable income information about future earnings is incremental to that in accruals and gold ?ows. Keywords: taxable income; deferred taxes; earnings quality; earnings management; marketplace ef?ciency. Data Availability: Data are available from sources identi?ed in the paper.
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I. INTRODUCTION he recent high-pro?le cases of ill of reported earnings to re?ect economic existence (e.g., in Enron, Global Crossing, Tyco, WorldCom, and Xerox) have focused the attention of investors and policymakers on earnings quality, that is, the extent to which reported earnings...If you want to get a full essay, order it on our website: Orderessay
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