Valuation of Tax Expense

48 Pages Posted: 28 Aug 2013  

Jacob K. Thomas

Yale School of Management

Frank Zhang

Yale School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: August 26, 2013

Abstract

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

Thomas, Jacob K. and Zhang, Frank, Valuation of Tax Expense (August 26, 2013). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2316314

Jacob Kandathil Thomas

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Frank Zhang (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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