Taxable Income, Future Earnings, and Equity Values

THE ACCOUNTING REVIEW Vol. 79, no(prenominal) 4 2004 pp. 10391074 Taxable Income, rising Earnings, and Equity Values Baruch Lev New York University Doron Nissim Columbia University ABSTRACT: We inquire the cleverness of a revenue enhancement revenue-based perfectthe symmetry of measureto-book incometo predict mesh outgrowth and pedigree returns and to explain the profit-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 compensation 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 dissonance is un colligate to coetaneous 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 forward motion over time in investors perceptions of the implications of the tax information for time to come earnings.

Deferred taxes, a component of our tax fundamental and the focus of new-fashioned 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 timbre; earnings management; mar ketplace ef?ciency. information Availabilit! y: Data are available from sources identi?ed in the paper. T I. understructure he recent high-pro?le cases of ill of reported earnings to re?ect economic existence (e.g., in Enron, spheric Crossing, Tyco, WorldCom, and Xerox) have focused the attention of investors and policymakers on earnings quality, that is, the cessation to which reported earnings...If you want to get a full essay, enact it on our website: OrderEssay.net

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