The Relevance of Tax Cash Flow and Tax Expense

42 Pages Posted: 18 May 2017 Last revised: 17 Mar 2019

See all articles by Jeri K. Seidman

Jeri K. Seidman

University of Virginia - McIntire School of Commerce

Bridget Stomberg

Indiana University - Kelley School of Business

Date Written: March 2019

Abstract

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

Suggested Citation

Seidman, Jeri K. and Stomberg, Bridget, The Relevance of Tax Cash Flow and Tax Expense (March 2019). Available at SSRN: https://ssrn.com/abstract=2964920 or http://dx.doi.org/10.2139/ssrn.2964920

Jeri K. Seidman (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

Bridget Stomberg

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

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