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
Date Written: July 16, 2015
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
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