Sustainable Tax Strategies and Earnings Persistence
Sean T. McGuire
Texas A&M University - Department of Accounting
Stevanie S. Neuman
University of Missouri at Columbia - School of Accountancy
Thomas C. Omer
University of Nebraska at Lincoln - School of Accountancy
October 22, 2013
This study examines whether the sustainability of a firm’s tax strategy provides information about the persistence of a firm’s pre-tax earnings and earnings components. We also investigate whether investors are able to determine the sustainability of a firm’s tax strategy and use it as a signal to correctly price the persistence of a firm’s pre-tax earnings and earnings components. Sustainability is an additional dimension of a firm’s tax strategy that focuses on maintaining consistent tax avoidance outcomes over time. Consistent with the sustainability of a firm’s tax strategy providing unique information about earnings persistence and reflecting managers’ expectations of future earnings, we find that firms with more sustainable tax strategies exhibit more persistent pre-tax earnings and earnings components. We also find that investors are able to infer the sustainability of a firm’s tax strategy and use it as a signal to assess the persistence of pre-tax earnings and earnings components.
Number of Pages in PDF File: 54
Keywords: sustainable tax strategies, earnings persistence, earnings expectations
JEL Classification: M40, M41, M49
Date posted: October 28, 2011 ; Last revised: November 1, 2013
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