Taxable Income and Firm Risk

The Journal of the American Taxation Association: Vol. 39, No. 1, pp. 1-24, Spring 2017

51 Pages Posted: 1 Mar 2013 Last revised: 24 May 2017

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Morton Pincus

University of California, Irvine

Hye Seung (Grace) Lee

Fordham University - Accounting Area

Logan B. Steele

Oregon State University

Date Written: July 16, 2015

Abstract

We examine whether estimated taxable income provides incremental information about firms' operating risk. We develop taxable income-based measures that should be useful in assessing risk in a simple earnings predictability model. In our empirical tests these taxable income-based measures explain cross-sectional variation in the predictability and variability of future pre-tax financial performance. Further, these measures are associated with predictable variation in market-based measures of firm risk. Our findings shed light on how accounting information — specifically, book income and tax income — impacts investors' assessment of firm risk as well as improving our understanding of the extent and nature of information contained in estimated taxable income.

Keywords: Earnings Predictability, Firm Risk, Taxable Income, Book-Tax Differences

Suggested Citation

Dhaliwal, Dan S. and Pincus, Morton P.K. and Lee, Hye Seung (Grace) and Steele, Logan B., Taxable Income and Firm Risk (July 16, 2015). The Journal of the American Taxation Association: Vol. 39, No. 1, pp. 1-24, Spring 2017. Available at SSRN: https://ssrn.com/abstract=2226498 or http://dx.doi.org/10.2139/ssrn.2226498

Dan S. Dhaliwal (Contact Author)

University of Arizona - Department of Accounting (deceased)

Morton P.K. Pincus

University of California, Irvine ( email )

Irvine, CA 92697-3125
United States
949-824-4062 (Phone)
949-725-2812 (Fax)

Hye Seung (Grace) Lee

Fordham University - Accounting Area ( email )

Graduate School of Business
113 W. 60th Street
New York, NY 10023
United States

Logan B. Steele

Oregon State University ( email )

Corvallis, OR 97330
United States

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