Valuation of Tax Expense
48 Pages Posted: 28 Aug 2013
Date Written: August 26, 2013
As tax expense reflects value lost to taxes paid, it should be negatively associated with value, provided non-tax, value-relevant information is controlled for. However, valuation regressions estimated in prior research — using contemporaneous tax expense and non-tax variables — document substantial variation in the coefficients on tax expense, ranging from significant negative to significant positive values. We show this variation is a) caused by the omission of expected future profitability, b) explained by many factors that cause variation in the correlations among included variables and omitted future profitability. Unfortunately, difficulties associated with separating the impact of individual factors hampers tax research investigating links between tax expense coefficients and specific factors.
Keywords: Tax expense, stock returns, profitability, value relevance, valuation
JEL Classification: G12, G14, M41, H25
Suggested Citation: Suggested Citation