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

Posted: 14 Feb 2013

See all articles by Michael Mayberry

Michael 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: February 11, 2013

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 innate and discretionary components of smooth taxable income and whether those characteristics influence 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 smoothness reducing the uncertainty associated with future tax benefits and allowing firms to develop more successful tax avoidance strategies. Contrary to research that finds that smoothness enhances the information content of financial statement income, we find that smoothness reduces the information content of taxable income. This finding is consistent with the smoothness of taxable income either eliminating or reducing the information contained in the unique economic shocks experienced by taxable income.

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

JEL Classification: G32, H25, H32, M41

Suggested Citation

Mayberry, Michael and McGuire, Sean T. and Omer, Thomas C., Smooth Taxable Income, Tax Avoidance, and the Information Content of Taxable Income (February 11, 2013). 2013 American Taxation Association Midyear Meeting: New Faculty/ Doctoral Student Session. Available at SSRN: https://ssrn.com/abstract=2216877

Michael Mayberry (Contact Author)

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

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

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,142
PlumX Metrics