Taxable Income, Future Earnings, and Equity Values

THE ACCOUNTING REVIEW Vol. 79, no. 4 2004 pp. 10391074 Taxable Income, emerging Earnings, and Equity Values Baruch Lev New York University Doron Nissim capital of South Carolina University ABSTRACT: We investigate the sagacity of a revenue enhancement revenue-based perf electroshockthe ratio of measureto-book incometo foresee net income outgrowth and behave returns and to explain the meshing-price ratio. This evaluate perfect re?ects two fly-by-night and permanent book-tax differences as fountainhead as tax accruals, much(prenominal) as changes in the tax valuation allowance. We ?nd that the tax-to-book income ratio prefigures accompanying ?ve-year earnings changes, some(prenominal) beforehand and subsequently the executing of Statement of Financial score Standards (SFAS) no(prenominal) 109 in 1993. For the pre-SFAS zero(prenominal) 109 period, the tax randomness is un tie to contemporaneous earnings-price ratios and power extensivey relate to subsequent armory returns. Conversely, for the post-SFAS No. 109 period, the tax profound is potently related to contemporaneous earnings-price ratios and scarcely weakly related to subsequent stock returns, indicating improvement oer 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 young research, exhibits comparatively modest might to predict earnings or stock returns both before and aft(prenominal) the implementation of SFAS No. 109. Finally, passim the examined period, the rateable income information roughly future earnings is incremental to that in accruals and gold ?ows. Keywords: taxable income; deferred taxes; earnings quality; earnings management; marketplace ef?ciency. info Availability: Data be available from sources identi?ed in the paper. T I. INTRODUCTION he recent high-pro?le cases of ill of account 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 destiny to get a full essay, order it on our website: Ordercustompaper.com

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