The Information Content of Tax Expense: A Discount Rate Explanation

• 成果类型: Article
• 署名作者: Henry, Erin
• 署名单位: University of Memphis
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/1911-3846.12364
• 发表日期: 2018
• 页码: 1917-1940
• 关键词: VARIANCE DECOMPOSITION; CASH-FLOW; earnings management; foreign earnings; taxable income; stock returns; analysts; equity; RISK; determinants

摘要

I investigate the information content of income tax expense using variance decomposition to separate stock returns into cash flow and discount rate news components. While prior literature has focused on linking tax expense with expected future cash flows, I argue that tax expense should also be informative about discount rates because of its ability to summarize fundamental economic performance. Consistent with my arguments, I find that tax expense surprises are correlated with both revisions in future cash flows and revisions in discount rates; however, the economic magnitude of tax expense's impact on returns is primarily through the discount rate channel. I also perform cross-sectional tests, which reveal that the discount rate implications of tax expense are due not only to its ability to capture fundamental economic performance but also to its ability to convey information about a firm's earnings management and tax avoidance activities.