Taxable income and firm risk

Dan S Dhaliwal, Hye Seung Grace Lee, Morton Pincus, Logan B. Steele

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

We examine whether estimated taxable income provides incremental information about firms’ operating risk. We develop taxable income-based measures that should be useful in assessing risk in a simple earnings predictability model. In our empirical tests these taxable income-based measures explain cross-sectional variation in the predictability and variability of future pre-tax financial performance. Further, these measures are associated with predictable variation in market-based measures of firm risk. Our findings shed light on how accounting information-specifically, book income and tax income-impacts investors’ assessment of firm risk as well as improving our understanding of the extent and nature of information contained in estimated taxable income.

Original languageEnglish (US)
Pages (from-to)1-24
Number of pages24
JournalJournal of the American Taxation Association
Volume39
Issue number1
DOIs
Publication statusPublished - Mar 1 2017

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Keywords

  • Cost of capital
  • Performance variability, firm risk
  • Taxable income

ASJC Scopus subject areas

  • Accounting
  • Finance

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