Taxable Income, Future Profitability, and Stock Returns

Posted: 27 Mar 2020

See all articles by Bradley S. Blaylock

Bradley S. Blaylock

University of Oklahoma - Michael F. Price College of Business

Bradley Lawson

Oklahoma State University - Stillwater - School of Accounting

Michael Mayberry

University of Florida - Fisher School of Accounting

Date Written: March 3, 2020

Abstract

Prior research suggests that investors behave “as if” taxable income contains information about future performance by providing evidence of a positive association between taxable income and stock returns. We draw on the fundamental analysis literature and provide direct evidence on this assertion by examining whether taxable income predicts future pretax performance. We find that taxable income positively predicts future pretax cash flows, pretax book income, and “Street” pretax earnings, suggesting that taxable income provides incremental information to book income regarding performance. Moreover, we find a positive association between taxable income and analysts’ pretax forecasts, consistent with analysts utilizing the information in taxable income when forming earnings expectations. We do not find an association between taxable income and future analyst forecast errors, implying analysts do not overreact or underreact to taxable income's performance signal. Overall, we find that taxable income provides a signal of fundamental value and corroborate the implications of prior research.

Keywords: analyst forecasts, fundamental analysis, taxable income

Suggested Citation

Blaylock, Bradley S. and Lawson, Bradley and Mayberry, Michael, Taxable Income, Future Profitability, and Stock Returns (March 3, 2020). Available at SSRN: https://ssrn.com/abstract=3547964

Bradley S. Blaylock

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

Bradley Lawson

Oklahoma State University - Stillwater - School of Accounting ( email )

College of Business Administration
415 Business Building
Stillwater, OK 74078
United States

Michael Mayberry (Contact Author)

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

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