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 language | English (US) |
|---|---|
| Pages (from-to) | 1-24 |
| Number of pages | 24 |
| Journal | Journal of the American Taxation Association |
| Volume | 39 |
| Issue number | 1 |
| DOIs | |
| State | Published - Mar 1 2017 |
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Keywords
- Cost of capital
- Performance variability, firm risk
- Taxable income
ASJC Scopus subject areas
- Accounting
- Finance
Cite this
Taxable income and firm risk. / Dhaliwal, Dan S; Grace Lee, Hye Seung; Pincus, Morton; Steele, Logan B.
In: Journal of the American Taxation Association, Vol. 39, No. 1, 01.03.2017, p. 1-24.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Taxable income and firm risk
AU - Dhaliwal, Dan S
AU - Grace Lee, Hye Seung
AU - Pincus, Morton
AU - Steele, Logan B.
PY - 2017/3/1
Y1 - 2017/3/1
N2 - 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.
AB - 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.
KW - Cost of capital
KW - Performance variability, firm risk
KW - Taxable income
UR - http://www.scopus.com/inward/record.url?scp=85014808089&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85014808089&partnerID=8YFLogxK
U2 - 10.2308/atax-51610
DO - 10.2308/atax-51610
M3 - Article
VL - 39
SP - 1
EP - 24
JO - Journal of the American Taxation Association
JF - Journal of the American Taxation Association
SN - 0198-9073
IS - 1
ER -