Does Actual Taxable Income Contain Valuable Information For Shareholders? Evidence From Finland
DOI:
https://doi.org/10.14738/abr.510.3692Abstract
There is much discussion about usefulness of book-tax differences in evaluating firm performance. This study contributes to this discussion assessing the information content of estimated and actual taxable income for Finnish corporate data from 2012-2013. The findings for year 2012 show that book income has higher explanation power of stock returns than other income concepts. However, estimated taxable income does not bring any incremental explanatory power to book income whereas actual taxable income contains more relative and also incremental information. The findings show that the explanation power of estimated taxable income in high earnings quality firms is comparable with that of book income but insignificant in low earnings quality firms. On the contrary, the explanation power of actual taxable income is lower in high earnings quality firms and higher in low earnings quality firms. For high earnings quality firms, neither of the taxable income concepts brings incremental information to book income. For low earnings quality firms, estimated taxable income does not bring any incremental information to book income whereas actual taxable income does. For these firms, actual taxable income brings significant incremental information also to estimated taxable income. For year 2013, anticipated significant tax rate reduction largely mitigated the relevant relationships between returns and income concepts.
References
Ali, A. &Hwang, L.S. (2000). Country-specific factors related to financial reporting and the value relevance of accounting data. Journal of Accounting Research. 38(1): 1-21.
Ayers, B., Jiang, X. & Laplante, S. (2009). Taxable income as a performance measure: the effects of tax planning and earnings quality. Contemporary Accounting Research. 26(1): 15–54.
Biddle, G.C., Seow, G.S. & Siegel, A.F. (1995). Relative Versus Incremental Information Content. Contemporary Accounting Research. 12(1): 1-23.
Cohen, J. & Cohen, P. (1983). Applied multiple regression/correlation analysis for the behavioral sciences. Hillsdale, NJ: Erlbaum.
de Mooij, R.A. & Everdeen, S. (2008) Corporate tax elasticities: a reader’s guide to empirical findings. Oxford review of economic policy. 24(4): 680-697.
Dechow, P., Ge, W. & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics. 50(2-3): 344–401.
Desai, M. (2006). Testimony of Mihir Desai (Associate Professor of Harvard University) before the Subcommittee on Select Revenue Measures. Committee on Ways and Means, House of Representatives, May 9.
Hanlon, M. (2003). What can we infer about a firm’s taxable income from its financial statements? National Tax Journal 56(4): 831 -63.
Hanlon, M. (2005). The persistence and pricing of earnings, accruals and cash flows when firms have large booktax differences. The Accounting Review. 80(I): 137-66.
Hanlon, M. & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics 50(2-3): 127–
Hanlon, M., Laplante, S.K. & Shevlin, T. (2005). Evidence for the possible information loss of conforming book income and taxable income. Journal of Law and Economics. 48(2): 407-442.
Hanlon, M. & Shevlin, T. (2003). Book-tax conformity for corporate income: An introduction to the issues. NBER working paper no. 11067. Cambridge, MA: National Bureau for Economic Research.
Huizinga, H. & Laeven, L. (2008). International profit shifting within multinations: A multi-country perspective. Journal of Public Economics, 92(5-6): 1164-1182.
Kothari. S. P. (2001). Capital markets research in accounting. Journal of Accounting and Economics. 31(1-3): 105-
Lev, B. & Nissim, D. (2004). Taxable income, future earnings and equity values. The Accounting Review. 79(4): 1039-1074.
Lin, K. Z. (2006). The impact of tax holidays on earnings management: An empirical study of corporate reporting behavior in a developing economy framework. The International Journal of Accounting. 41(2):163-175.
Mills, L. & Plesko, G. (2003). Bridging the reporting gap: A proposal for more informative reconciling of book and tax income. National Tax Journal. 56(4): 865-93.
Phillips, J., Pincus, M. & Rego, S.O. (2003). Earnings management: New evidence based on deferred tax expense. The Accounting Review. 78(2): 491–521.
Plesko, G. (2000). Book-tax differences and the measurement of corporate income. NTA Proceedings 1999. 171-176. Washington, DC: National Tax Association.
Plesko, G. (2006). Estimates of the magnitude of financial and tax reporting conflicts. Working paper. University of Connecticut.
Revsine, L., Collins, D. & Johnson, B. (2002). Financial reporting and analysis. Upper Saddle River, NJ: Prentice Hall.
Roubi, R. & Richardson, A. (1998). Managing discretionary accruals in response to reductions in corporate tax rates in Canada, Malaysia and Singapore. The International Journal of Accounting 33 (4): 455–467.
Shevlin, T. (2002). Commentary on corporate tax shelters and book-tax differences. Tax Law Review. 55(3): 427-
Williams, E. J. (1959). The comparison of regression variables. Journal of the Royal Statistical Society (Series B). 21(2): 396-399.
Wong, R.M.K., Lo, A.W. & Firth, M. (2015). Managing Discretionary Accruals and Book-Tax Differences in Anticipation of Tax Rate Increases: Evidence from China. Journal of International Financial Management & Accounting. 26(2): 188-222.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2017 Archives of Business Research
This work is licensed under a Creative Commons Attribution 4.0 International License.
