Taxable Income, Future Profitability, and Stock Returns

24 Pages Posted: 30 Sep 2020

See all articles by Bradley Blaylock

Bradley Blaylock

University of Oklahoma

Bradley Lawson

Oklahoma State University - Stillwater - School of Accounting

Michael Mayberry

University of Florida - Fisher School of Accounting

Date Written: July-August 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 and Lawson, Bradley and Mayberry, Michael, Taxable Income, Future Profitability, and Stock Returns (July-August 2020). Journal of Business Finance & Accounting, Vol. 47, Issue 7-8, pp. 858-881, 2020, Available at SSRN: https://ssrn.com/abstract=3700040 or http://dx.doi.org/10.1111/jbfa.12448

Bradley Blaylock (Contact Author)

University of Oklahoma

307 W Brooks
Norman, OK 73019
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

University of Florida - Fisher School of Accounting ( email )

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1
Abstract Views
149
PlumX Metrics