Smoothness and the Value Relevance of Taxable Income

Posted: 14 Aug 2012 Last revised: 25 Aug 2015

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

Date Written: May 14, 2012

Abstract

This study investigates whether the smoothness of estimated taxable income influences its value relevance. Contrary to research that finds that smoothness enhances the value relevance of book income, we find that smoothness reduces the value relevance of taxable income. We decompose the smoothness of taxable income into its innate and discretionary components and find that innate smoothness is not associated with the value relevance of taxable income. However, we find that discretionary smoothness is associated with a reduction in taxable income’s value relevance, suggesting that discretionary smoothness either eliminates or reduces the information contained in taxable income. In additional analysis, we find that discretionary smoothness is also associated with higher levels of future tax avoidance, consistent with managers smoothing taxable income as part of their tax avoidance strategy. In combination, our results suggest that the reduced value relevance of estimated taxable income is a by-product of managers’ tax planning strategy.

Keywords: Income smoothing, taxable income, tax avoidance, value relevance

JEL Classification: G32, H25, H32, M41

Suggested Citation

Mayberry, Michael A. and McGuire, Sean T. and Omer, Thomas C., Smoothness and the Value Relevance of Taxable Income (May 14, 2012). Journal of American Taxation Association, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2128695 or http://dx.doi.org/10.2139/ssrn.2128695

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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