Taxable Income, Future Earnings, and Equity Values

THE ACCOUNTING REVIEW Vol. 79, no(prenominal) 4 2004 pp. 10391074 Taxable Income, emergent Earnings, and Equity Values Baruch Lev New York University Doron Nissim capital of South Carolina University ABSTRACT: We investigate the cleverness of a revenue enhancement revenue-based perfelectroconvulsive therapythe symmetry of measureto-book incometo call moolah outgrowth and course returns and to explain the cyberspace-price ratio. This revenue underlying re?ects two fugitive and permanent book-tax differences as wellspring as tax accruals, such(prenominal) as changes in the tax valuation allowance. We ?nd that the tax-to-book income ratio calculates posterior ?ve-year earnings changes, both beforehand and subsequently the slaying of Statement of Financial accounting Standards (SFAS) no. 109 in 1993. For the pre-SFAS no 109 period, the tax randomness is un touch base to contemporaneous earnings-price ratios and power full moony related to subsequent lineage returns. Conversely, for the post-SFAS No. 109 period, the tax primordial is potently related to contemporaneous earnings-price ratios and solitary(prenominal) weakly related to subsequent stock returns, indicating improvement all over time in investors perceptions of the implications of the tax information for future earnings.

Deferred taxes, a component of our tax fundamental and the focus of youthful research, exhibits relatively modest might to predict earnings or stock returns both before and later the implementation of SFAS No. 109. Finally, throughout the examined period, the rateable income information around future earnings is additive to that in accruals and gold ?ows. Keywords: taxable income; deferred taxes; earnings quality; earnings management; marketplace ef?ciency. info Availability: Data argon available from sources identi?ed in the paper. T I. INTRODUCTION he recent high-pro?le cases of ill of inform earnings to re?ect economic existence (e.g., in Enron, Global Crossing, Tyco, WorldCom, and Xerox) have concentrate the attention of investors and policymakers on earnings quality, that is, the extent to which reported earnings...If you indirect request to get a full essay, order it on our website: Ordercustompaper.com

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