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Smoothing Taxable Income, Tax Avoidance, and the Information Content of Taxable Income


Michael A. Mayberry


University of Florida - Fisher School of Accounting

Sean T. McGuire


Texas A&M University - Department of Accounting

Thomas C. Omer


University of Nebraska at Lincoln - School of Accountancy

May 14, 2012

Mays Business School Research Paper No. 2012-81

Abstract:     
Prior research examines whether firms smooth their financial statement earnings. However, recent research also suggests that firms have significant incentives to smooth their taxable income. This study investigates whether smoothing taxable income influences the outcomes of firms’ future tax avoidance activities as well as the information content of taxable income. We find that firms with smoother taxable income have more favorable outcomes in their future tax avoidance activities (i.e., exhibit higher levels of future tax avoidance), which is consistent with smoothing taxable income reducing the uncertainty associated with future tax benefits and allowing firms to develop more successful tax avoidance strategies. Contrary to research that finds that smoothing enhances the information content of financial statement income, we find that smoothing reduces the information content of taxable income. This finding is consistent with managers smoothing taxable income to achieve specific tax objectives, likely distorting the information contained in taxable income.

Number of Pages in PDF File: 43

Keywords: Income smoothing, taxable income, tax avoidance, information content

JEL Classification: G32, H25, H32, M41

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Date posted: August 14, 2012 ; Last revised: December 18, 2012

Suggested Citation

Mayberry, Michael A. and McGuire, Sean T. and Omer, Thomas C., Smoothing Taxable Income, Tax Avoidance, and the Information Content of Taxable Income (May 14, 2012). Mays Business School Research Paper No. 2012-81. Available at SSRN: http://ssrn.com/abstract=2128695 or http://dx.doi.org/10.2139/ssrn.2128695

Contact Information

Michael A. Mayberry
University of Florida - Fisher School of Accounting ( email )
Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States
Sean T. McGuire
Texas A&M University - Department of Accounting ( email )
430 Wehner
College Station, TX 77843-4353
United States
Thomas C. Omer (Contact Author)
University of Nebraska at Lincoln - School of Accountancy ( email )
307 College of Business Administration
Lincoln, NE 68588-0488
United States
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