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Sustainable Tax Strategies and Earnings Persistence

54 Pages Posted: 28 Oct 2011 Last revised: 1 Nov 2013

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

Date Written: October 22, 2013

Abstract

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.

Keywords: sustainable tax strategies, earnings persistence, earnings expectations

JEL Classification: M40, M41, M49

Suggested Citation

McGuire, Sean T. and Neuman, Stevanie S. and Omer, Thomas C., Sustainable Tax Strategies and Earnings Persistence (October 22, 2013). Available at SSRN: https://ssrn.com/abstract=1950378 or http://dx.doi.org/10.2139/ssrn.1950378

Sean T. McGuire

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Stevanie S. Neuman (Contact Author)

University of Missouri at Columbia - School of Accountancy ( email )

College of Business
Columbia, MO 65211
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

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