Tax Expense Momentum

48 Pages Posted: 12 Dec 2007 Last revised: 14 Oct 2010

See all articles by Jacob K. Thomas

Jacob K. Thomas

Yale School of Management

Frank Zhang

Yale School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: October 10, 2010

Abstract

We investigate the joint hypothesis that a) tax expense contains information about core profitability that is incremental to reported earnings and b) that information is reflected in stock prices with a delay. We find that seasonally-differenced quarterly tax expense, our proxy for tax expense surprise, is related positively to future returns. This anomaly is separate from previously documented pricing anomalies based on financial and tax variables. Additional investigation reveals that tax expense surprise is related positively to changes in future quarterly earnings and tax expense, and both those future changes are related positively to future returns. Investors appear to underestimate the implications of tax expense surprise for next quarter’s earnings and tax expense, and respond with a delay when information about those predictable implications is disclosed subsequently.

Keywords: tax expense, stock return, anomaly, momentum

JEL Classification: G12, G14, H25, M41

Suggested Citation

Thomas, Jacob Kandathil and Zhang, Frank, Tax Expense Momentum (October 10, 2010). Available at SSRN: https://ssrn.com/abstract=1068228 or http://dx.doi.org/10.2139/ssrn.1068228

Jacob Kandathil Thomas

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Frank Zhang (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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