Tax Expense Momentum
48 Pages Posted: 12 Dec 2007 Last revised: 14 Oct 2010
Date Written: October 10, 2010
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: Suggested Citation