Author: Andrew Schmidt
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
I examine whether earnings generated by changes in effective tax rates (the tax change component) persist and aid in forecasting future earnings. In addition, this study investigates to what extent investors incorporate the forecasting implications of the tax change component of earnings into stock prices. I find that there is a positive, significant association between the tax change component of earnings and future earnings. I use the interim reporting requirements of APB No. 28 (APB 1973) and FASB Interpretation No. 18 (FASB 1977) to further decompose the tax change component into an initial and a revised portion based on the first quarter estimate of the annual ETR. I find that the initial tax change component is more persistent for future earnings than the revised tax change component. These results are consistent with my hypotheses that the initial and revised tax change components have differential persistence and forecasting implications, and dispute the broad notion advanced by prior literature that ETR-related earnings changes are transitory. Results from market tests indicate that the market underweights the forecasting implications of the tax change component and the mispricing appears to be driven by the transitory nature of the revised tax change component.
Author: Andrew Schmidt
Publisher:
ISBN:
Category :
Languages : en
Pages : 47
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Book Description
I examine whether and under what circumstances changes in net income caused by changes in effective tax rates (ETRs) (the tax change component) persist and whether the tax change component aids in forecasting future earnings incremental to aggregate earnings excluding the tax change. I decompose the tax change component of earnings into an initial and revised portion, which I hypothesize to have differential persistence and forecasting implications. Finally, I utilize the Mishkin (1983) procedure to determine if the market recognizes the forecasting implications of the differential persistence of the initial and revised tax change components. My results indicate that the tax change component is negatively associated with future tax changes. I find that the initial tax change component is more persistent for future tax changes than the revised tax change component. Additionally, I find that the initial tax change component is useful in forecasting future earnings, while the revised tax change component is not. These results are consistent with my hypotheses that the initial and revised tax change components have differential persistence and forecasting implications, and dispute the notion that changes in ETRs are transitory. Mishkin (1983) test results indicate that the market underestimates the persistence of the revised tax change component and the mispricing appears to be driven by firms in industries with above-average intra-year variation in the tax change component of earnings.
Author: Andrew Philip Schmidt
Publisher:
ISBN:
Category : Corporate profits
Languages : en
Pages : 152
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Book Description
Author: Sangwan Kim
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Despite the central importance of equity analysts as information intermediaries in capital markets, prior studies provide only limited evidence on how analysts use tax information reported in financial statements. To seek a deeper understanding of the mechanisms that underlie analysts' use of tax information in GAAP financial statements, we investigate the association between sell-side equity analysts' forecasts and the change in earnings attributable to a change in ETRs (i.e., the tax change component of earnings). We provide evidence that the persistence of the tax change component of earnings embedded in analysts' forecasts is systematically lower than that implied by our model's time-series properties. Recent research shows that the persistence of the tax change component of earnings is a complex combination of both the persistence of pretax earnings and the persistence of the ETR. We provide evidence that the analysts' underestimation of the tax change component of earnings is primarily attributable to analysts' failure to impound the full implications of the difference between permanent and transitory ETR changes. The results also provide strong evidence that analysts' underreaction to the tax change component of earnings is significantly attenuated when managers voluntarily provide earnings forecasts. Further, analysts' incorporation of tax information into earnings forecasts becomes less biased after Regulation FD. This research answers the call from Graham, Raedy, and Shackelford (2012) for more research into the underlying fundamentals of tax-based information prepared in accordance with GAAP, and the extent to which various financial statement users, including sophisticated market participants such as equity analysts, use tax-based information.
Author: John R. Graham
Publisher: Now Pub
ISBN: 9781601986122
Category : Business & Economics
Languages : en
Pages : 176
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Book Description
Accounting for Income Taxes is the most comprehensive review of AFIT research. It is designed both to introduce new scholars to this field and to encourage active researchers to expand frontiers related to accounting for income taxes. Accounting for Income Taxes includes both a primer about the rules governing AFIT (Sections 3-4) and a review of the scholarly studies in the field (Sections 5-8). The primer uses accessible examples and clear language to express essential AFIT rules and institutional features. Section 3 reviews the basic rules and institutional details governing AFIT. Section 4 discusses ways that researchers, policymakers, and other interested parties can use the tax information in financial statements to better approximate information in the tax return. The second half of the monograph reviews the extant scholarly studies by splitting the research literature into four topics: earnings management, the association between book-tax differences and earnings characteristics, the equity market pricing of information in the tax accounts, and book-tax conformity. Section 5 focuses on the use of the tax accounts to manage earnings through the valuation allowance, the income tax contingency, and permanently reinvested foreign earnings. Section 6 discusses the association between book-tax differences and earnings characteristics, namely earnings growth and earnings persistence. Section 7 explores how tax information is reflected in share prices. Section 8 reviews the increased alignment of accounting for book purposes and tax purposes. The remainder of the paper focuses on topics of general interest in the economics and econometric literatures. Section 9 highlights some issues of general importance including a theoretical framework to interpret and guide empirical AFIT studies, the disaggregated components of book-tax differences and research opportunities as the U.S. moves toward International Financial Reporting Standards (IFRS). Section 10 discusses econometric weaknesses that are common in AFIT research and proposes ways to mitigate their deleterious effects.
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages : 190
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Book Description
This dissertation examines the persistence and value relevance of earnings attributable to tax savings and the extent to which this persistence and value relevance differs from those of nontax earnings. After controlling for factors previously shown to be systematically associated with the tax component of earnings, results show that tax savings are significant and statistically persistent but statistically less persistent than earnings from nontax sources. Results also reveal that the persistence of tax savings changes across tax regimes whereas earnings from nontax sources remain relatively unchanged. Contextual analysis shows that (1) the persistence of tax savings is largely driven by firms in the pharmaceutical, oil and gas, financial services, insurance and real estate industries, (2) the persistence of tax savings is increasing in the R & D tax credit and (3) this persistence is increasing in settings where the ratio of foreign over domestic earnings is increasing. Additionally, the persistence and value relevance of tax savings is increasing for positive tax savings, implying a market reward (penalty) for lower (higher) tax savings (reported effective tax rates). When I compare the results from my valuation tests with those from my persistence tests, I find that tax savings are sometimes not persistent but value relevant and sometimes persistent but not value relevant whereas the persistence and value relevance of nontax earnings are always consistent. These findings are consistent with managerial opportunistic behavior, a market that suspects managerial opportunistic behavior or a stock market that does not understand fully the persistence of tax savings relative to nontax savings. Results from the Mishkin (1983) test show that the market appears to significantly overestimate both the persistence of tax savings and nontax earnings, implying that securities are mispriced. This potential mispricing appears to be more severe for tax savings, implying that, on average, the market does not appear to understand fully the persistence and value relevance of the tax component of earnings. Finally, this study reconciles some of the mixed results of prior research and carries significant implications for policy makers, firm management, market participants and accounting researchers.
Author: Michelle Lee Hanlon
Publisher:
ISBN:
Category : Corporations
Languages : en
Pages : 130
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Book Description
Author: Frederic S. Mishkin
Publisher: University of Chicago Press
ISBN: 0226531929
Category : Business & Economics
Languages : en
Pages : 184
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Book Description
A Rational Expectations Approach to Macroeconometrics pursues a rational expectations approach to the estimation of a class of models widely discussed in the macroeconomics and finance literature: those which emphasize the effects from unanticipated, rather than anticipated, movements in variables. In this volume, Fredrick S. Mishkin first theoretically develops and discusses a unified econometric treatment of these models and then shows how to estimate them with an annotated computer program.
Author: Sue Joy Wright
Publisher:
ISBN: 9780170261951
Category : Business enterprises
Languages : en
Pages : 720
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Book Description
Business Analysis and Valuation has been developed specifically for students undertaking accounting Valuation subjects. With a significant number of case studies exploring various issues in this field, including a running chapter example, it offers a practical and in-depth approach. This second edition of the Palepu text has been revitalised with all new Australian content in parts 1-3, making this edition predominantly local, while still retaining a selection of the much admired and rigorous Harvard case studies in part 4. Retaining the same author team, this new edition presents the field of valuation accounting in the Australian context in a clear, logical and thorough manner.
Author: Baruch Lev
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We investigate the ability of a tax-based fundamental - the ratio of tax-to-book income - to predict earnings growth and stock returns and to explain the earnings-price ratio. This tax fundamental reflects both temporary and permanent book-tax differences as well as tax accruals, such as changes in the tax valuation allowance. We find that the tax-to-book income ratio predicts subsequent five-year earnings changes, both before and after the implementation of Statement of Financial Accounting Standards (SFAS) No. 109 in 1993. For the pre-SFAS 109 period, the tax information is unrelated to contemporaneous earnings-price ratios and strongly related to subsequent stock returns. Conversely, for the post-SFAS 109 period, the tax fundamental is strongly related to contemporaneous earnings-price ratios and only weakly related to subsequent stock returns, indicating improvement 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 recent research, exhibit relatively modest ability to predict earnings or stock returns both before and after the implementation of SFAS 109. Finally, throughout the examined period, the taxable income information about future earnings is incremental to that in accruals and cash flows.
