Taxable Income, Future Earnings, and Equity Values

2004 ◽  
Vol 79 (4) ◽  
pp. 1039-1074 ◽  
Author(s):  
Baruch Lev ◽  
Doron Nissim
Keyword(s):  
Stock Returns ◽  
Cash Flows ◽  
Financial Accounting ◽  
Price Ratio ◽  
Taxable Income ◽  
Future Earnings ◽  
Valuation Allowance ◽  
Equity Values ◽  
Before And After ◽  
Income Ratio

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 No. 109 period, the tax information is unrelated to contemporaneous earnings-price ratios and strongly related to subsequent stock returns. Conversely, for the post-SFAS No. 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, exhibits relatively modest ability to predict earnings or stock returns both before and after the implementation of SFAS No. 109. Finally, throughout the examined period, the taxable income information about future earnings is incremental to that in accruals and cash flows.

scholarly journals Do corporate bond rating revisions convey information about earnings and dividend changes?

2012 ◽  
Vol 9 (3) ◽  
pp. 373-393 ◽  
Author(s):  
Steven T. Anderson ◽  
Gurmeet Singh Bhabra ◽  
Harjeet S. Bhabra ◽  
Asjeet S. Lamba
Keyword(s):  
Stock Returns ◽  
Cash Flows ◽  
Corporate Bond ◽  
Bond Rating ◽  
Future Earnings ◽  
Rating Agencies ◽  
Abnormal Stock Returns ◽  
Rating Changes ◽  
Future Cash Flows ◽  
Rating Downgrades

We study the information content of corporate bond rating changes regarding future earnings and dividends. Consistent with previous findings, rating downgrades are associated with negative abnormal stock returns, while rating upgrades appear to be nonevents. For downgrades, earnings decline in the two years prior to and the year of the rating change announcement but increase in the year after the rating review. We also find that rating downgrades are followed by a subsequent downward adjustment in dividends. While rating upgrades follow a period of rising earnings, they do not signal any increase in future earnings and no subsequent dividend adjustments are observed. Overall, our results indicate that rating agencies respond more to permanent changes in cash flows and provide little information, if any, about future cash flows.

scholarly journals Information content and informativeness of analysts’ report: evidence from Malaysia

2018 ◽  
Vol 16 (4) ◽  
pp. 742-763 ◽  
Author(s):  
Hassanudin Mohd Thas Thaker ◽  
Azhar Mohamad ◽  
Nazrol Kamil Mustaffa Kamil ◽  
Jarita Duasa
Keyword(s):  
Stock Returns ◽  
Information Content ◽  
Abnormal Return ◽  
Descriptive Analysis ◽  
Strong Association ◽  
Cash Flows ◽  
Price Ratio ◽  
Cumulative Abnormal Return ◽  
Target Price ◽  
Content Type

PurposeThis study aims to document the influence of information content and the informativeness of analyst reports towards cumulative abnormal return in the Malaysian market.Design/methodology/approachSamples of analyst reports for the period 4th January 2010 until 24th December 2015 were collected from the Bursa Malaysia’s repository system for daily basis information. The study uses market-adjusted method for the calculation of cumulative abnormal return and panel regression to test the research objective. In addition, diagnostic tests, which include the variance inflation factor (VIF), correlation analysis, heteroscedasticity tests, serial auto-correlation and the Hausman test, were also performed to ensure the validity and reliability of the data.FindingsResult from the unbalanced panel data reveals that not all information contained in the analyst reports is able to detect stock returns movement. Only five variables are shown to have a strong association with the returns, and these are target price, earnings forecast, return on equity, cash flows to price and sales to price ratio. TheR-square value has also been shown to be relatively low (0.79 per cent), indicating the low predictive power of information content and the informativeness of the analyst report in explaining stock returns. To support the findings based on the knowledge obtained, a descriptive analysis on whether the analyst reports were able to predict the recommendation accurately was performed. Result from the descriptive analysis shows that only 57 per cent of the recommendations are accurate, evidenced by the differing target price and ending price. This outcome appears to contradict the theory of signalling hypothesis. Hence, it can be concluded that analyst reports have less informational role among investors.Originality/valueThis paper has, thus, provided insight into how information disclosed in the analyst report influence the return of stocks, further extending the limited research on analyst report in the context of the Malaysian markets. The paper has also added to the existing literature by providing several implications to practitioners and researchers alike.

The Persistence and Pricing of Earnings, Accruals, and Cash Flows When Firms Have Large Book-Tax Differences

2005 ◽  
Vol 80 (1) ◽  
pp. 137-166 ◽  
Author(s):  
Michelle Hanlon
Keyword(s):  
Cash Flows ◽  
Earnings Persistence ◽  
Taxable Income ◽  
Future Earnings ◽  
Special Items ◽  
Potential Sources ◽  
Red Flag

I investigate the role of book-tax differences in indicating the persistence of earnings, accruals, and cash flows for one-period-ahead earnings. I also examine whether the level of book-tax differences influences investors' assessments of future earnings persistence. I find that firm-years with large book-tax differences have earnings that are less persistent than firm-years with small book-tax differences. Further, the evidence is consistent with investors interpreting large positive book-tax differences (book income greater than taxable income) as a “red flag” and reducing their expectation of future earnings persistence for these firm-years. I then investigate potential sources of the lower persistence for firm-years with large book-tax differences. I find that special items contribute in part to the results but that firm-years with large booktax differences continue to have lower persistence in earnings after controlling for the effect of the special items.

PENGARUH INFORMASI LABA AKUNTANSI, ALIRAN KAS DAN KOMPONEN ALIRAN KAS TERHADAP HARGA SAHAM PADA PERUSAHAAN MANUFAKTUR DI INDONESIA

2005 ◽  
Vol 1 (2) ◽  
pp. 79
Author(s):  
Ferry Ferry ◽  
Erny Ekawati
Keyword(s):  
Stock Returns ◽  
Cash Flow ◽  
Stock Prices ◽  
Stock Price ◽  
Cash Flows ◽  
Negative Influence ◽  
Positive Influence ◽  
Financial Accounting ◽  
Statement Of Cash Flows ◽  
The One

Brfoo 1994, the one way measurcd pdormance of go public compa4y is earning afier tu, but on September 7, 1994 the Indonesian Institute olAccountants (IAI) published the statement of financial Accounting Standard (PSAK) No.2, "statement of Cash Flows" requires companiesto pubtish the statewent of cash flows beginning from January I, tggs. So investors had two kinds measurement of performance go public companies.The objective of study is to aplain the influence of informationcontent of accounting income, total cash Jlows, and components of cash flow with stock price in lidonesian manufacuring firms The accounting income is earning afiir ta,tc before extra ordinary item and discontinued operations and total cash flows is a sum of cash flow from operating activities, cash llow from investing activities, and cash tlow from financing activities.This study was constitute replicated study from Triyono and Yogiyanto (2000) about the association of information content of total cash flows, components of cash Jlows, and accoun:ting income with stock prices or stock returns. This study took sample frorn manufacnring firms lisfed in the Jakarta Stock Exciange @ni) from 1999-iOOZ tnoT"had pubtished aadited financial statement. Stock prices using monthly prices that hadended December 1999-2002. The statistics method used to test ltypotheses is a linier multiple regression. The model was considered: levek')odet.  The empirical results with using the first model levels about the influ. hence information of accounting income and total cash flows with stock prices can be explained accounting income gave positive influence and significant with stock prices whereas total cash flows gcMe negative and tlgnil*nt with stock prices. In the second model levels about the influ- ,i"i ,nyn *ation of cash flow from operating actiu.ities, cash flow from investing activities, and cash flow from financing octivities with stock pri, i* b" explained, separated total gash fl9ws into.yomponents. of 'cash flows gave negative influence and significant with stock prices "rp"ifolly iash ltoi from aperating octivities and c-ash flow from finincing activities. In the third model levels obout influence information of acciunting income and components of cash Jlows with stock prices irn be expliined, accounting income gave positive inlluence and significont with stock prices whereas companents of cosh tlows gNe negative influence and significant with stock prices'Keywords : accounting Income, cash Flows, components of cashflows, levels model

Does Consolidation of Variable Interest Entities Improve the Pricing of Financial Reporting in Bank Holding Companies? Evidence From FAS 166/167

2021 ◽  
pp. 0148558X2098737
Author(s):  
Audrey Wen-hsin Hsu ◽  
Hamid Pourjalali ◽  
Joshua Ronen
Keyword(s):  
Financial Institutions ◽  
Financial Reporting ◽  
Market Reaction ◽  
Cash Flows ◽  
Financial Accounting ◽  
Holding Companies ◽  
Future Earnings ◽  
Consumer Loans ◽  
Earnings Surprises ◽  
Variable Interest Entities

The study examines whether consolidating qualified special-purpose entities (QSPEs) under Statement of Financial Accounting Standards Nos. 166 and 167 (FAS 166/167) improves the market reaction to earnings disclosures. We use a difference-in-difference design to compare the change sample, which is defined as banks that consolidate QSPEs after FAS 166/167, with the no-effect sample, which is defined as financial institutions with no QSPEs or banks that do not consolidate QSPEs after FAS 166/167. The results show that, during a short window around earnings announcements, the change sample experiences higher market reaction to earnings surprises than the no-effect sample after the implementation of FAS 166/167. We also find that the effect is more pronounced in banks that engage in securitization and in financial institutions whose securitized loans originate primarily from consumer loans rather than mortgages. Additional analysis also finds that adopting FAS 166/167 enhances the ability of earnings to predict future earnings and future cash flows in banks. The important implication of the study for regulators is that FAS 166/167 improves bank transparency.

scholarly journals Managers’ Investment Decisions: Incentives and Economic Consequences Arising from Leases

2021 ◽  
Vol 14 (4) ◽  
pp. 165
Author(s):  
Tim V. Eaton ◽  
Craig Nichols ◽  
James Wahlen ◽  
Matthew Wieland
Keyword(s):  
Stock Returns ◽  
Financial Reporting ◽  
Cash Flows ◽  
Economic Consequences ◽  
Share Price ◽  
Investment Efficiency ◽  
Sales Growth ◽  
Earnings Growth ◽  
Future Earnings ◽  
Free Cash Flows

What incentives do managers face that might give rise to inefficient investments in leases? If managers make inefficient investments in leases, what economic consequences arise for those managers and their firms? We develop a model of expected investments in leased assets and use the residuals from the model as proxies for inefficient investments. We find that, in contrast to investments in capital expenditures, leasing appears to be a mechanism through which managers can seemingly over-invest, even among firms with high quality financial reporting and negative free cash flows. Examining economic consequences, we predict and find that unexpected investments in leased assets trigger increasing future sales growth but declining future earnings growth for as long as three years ahead. We also find a negative relation with contemporaneous stock returns, suggesting investors view unexpected investments in leases as value destructive. Finally, despite negative returns consequences, we find that unexpected investments in leases are associated with higher CEO compensation driven primarily by future sales growth. Our study suggests that compensation contracts that reward growth may give managers’ incentives to drive sales growth with larger-than-expected investments in leased assets, which lead to slower future earnings growth and negative share price consequences for investors. Our results should inform managers and board members, investors, and researchers interested in investment efficiency, corporate governance, and leases.

scholarly journals Volatilities of Book Income and Taxable Income and Their Risk Relevance

2018 ◽  
Vol 7 (11) ◽  
pp. 212
Author(s):  
Joonhyun Kim
Keyword(s):  
Stock Returns ◽  
Stock Prices ◽  
Risk Measure ◽  
Financial Accounting ◽  
Firm Risk ◽  
Income Volatility ◽  
Earnings Volatility ◽  
Taxable Income ◽  
Earnings Information ◽  
Accounting Principle

This study investigates the volatility of book income and taxable income, and their relevance to stock returns variability. Book income is recognized under the financial accounting principle whereas taxable income is determined on the basis of legal right. Thus, the two types of earnings can provide different sets of information to investors. Particularly related to the role of earnings as a risk measure, this study shows that book income is more volatile than taxable income, which indicates that taxable income is relatively more consistent and predictable. Further, the volatility of book income is strongly positively related to stock return variability while the taxable income volatility is insignificantly associated with the stock returns volatility. Additional analysis shows that the earnings volatility is more closely linked to the systematic risk of stock prices than the idiosyncratic risk. In conclusion, this study suggests that book income and taxable income is mutually different in terms of earnings variability and its relevance to firm risk. The findings also indicate that those two sets of earnings information are complementary to each other and provides investors with useful information to assess underlying firm risk.

Evidence of the Abnormal Accrual Anomaly Incremental to Operating Cash Flows

2006 ◽  
Vol 81 (5) ◽  
pp. 1151-1167 ◽  
Author(s):  
C. S. Agnes Cheng ◽  
Wayne B. Thomas
Keyword(s):  
Cash Flows ◽  
Current Debate ◽  
Price Ratio ◽  
Accrual Anomaly ◽  
Earnings Announcement ◽  
Future Earnings ◽  
Multiple Measures ◽  
Operating Cash Flows ◽  
Announcement Returns ◽  
Abnormal Accruals

Recent research provides evidence that the operating cash flows-to-price ratio subsumes accruals in explaining future annual returns. This suggests that the accrual anomaly is part of the overall value-glamour anomaly and does not represent the mispricing of earnings. We extend the literature by using multiple measures of abnormal accruals and separate analyses of future annual returns and future earnings announcement returns. The results reveal that the operating cash flows-to-price ratio does not subsume abnormal accruals in explaining future annual returns or future announcement returns. We also find that the operating cash flows-to-price ratio does not subsume total accruals in explaining future announcement returns. These results are not consistent with accruals being a manifestation of the value-glamour anomaly. Our study contributes to the current debate on the existence and the extent of the (abnormal) accrual anomaly. Moreover, the methodology employed can help researchers in exploring mispricing phenomena.

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