The Relevance of Tax Cash Flow and Tax Expense
42 Pages Posted: 18 May 2017 Last revised: 17 Mar 2019
Date Written: March 2019
Empirical evidence on the relevance of cash flows and accruals, and changes in relevance over time is mixed. We extend this literature by examining the relevance of tax cash flow and tax expense. Income taxes offer a strong setting to study relevance because firms report both an accrual-based and cash flow-based measure of tax. We find the incremental predictive power of current-period tax cash flow for future tax cash flow is greater than that of current-period tax expense for future tax cash flow. Tax cash flow also dominates tax expense in explaining returns. Together, these results suggest tax cash flow is more relevant than tax expense. Our study extends the value relevance literature by demonstrating that specific accruals behave differently than aggregate accruals. Our study also informs the FASB’s decision about whether to require increased tax cash flow disclosure.
Keywords: Valuation, tax expense, cash taxes paid, disclosure
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