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.

Determinants and Consequences of Firms' Derivative Accounting Decisions

2020 ◽  
Vol 5 (1) ◽  
pp. 81-114 ◽  
Author(s):  
Spencer Pierce
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Fair Value ◽  
Financial Accounting ◽  
Firm Risk ◽  
Accounting Firms ◽  
Earnings Volatility ◽  
Hedge Accounting ◽  
Reported Earnings ◽  
Jel Classifications

ABSTRACTFinancial accounting standards require derivatives to be recognized at fair value with changes in value recognized immediately in earnings. However, if specified criteria are met, firms may use an alternative accounting treatment, hedge accounting, which is intended to better represent the underlying economics of firms' derivative use. Using FAS 161 disclosures, I examine determinants of hedge accounting use and the effects of hedge accounting on financial reporting and capital markets. I find variation in firms' hedge accounting use and provide evidence that compliance costs of applying hedge accounting affect firms' decision to use hedge accounting. Firms decrease their reported earnings volatility via derivatives that receive hedge accounting and could further decrease their earnings volatility if hedge accounting were applied to all their derivatives. Inconsistent with arguments given for using hedge accounting, I fail to find a decrease in investors' assessments of firm risk from using hedge accounting.JEL Classifications: M40; M41; G32.

scholarly journals Use Of Earnings Information For Stock Pricing In Different Market Cycles: The Effect Of Discretionary Accruals

2011 ◽  
Vol 7 (5) ◽  
Author(s):  
Alireza Daneshfar ◽  
Mohammad J. Saei
Keyword(s):  
Earnings Management ◽  
Stock Returns ◽  
Stock Prices ◽  
Discretionary Accruals ◽  
Ratio Analysis ◽  
Test Results ◽  
Font Size ◽  
True Nature ◽  
Earnings Information ◽  
Abnormal Stock Returns

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">This study examines the association between stock prices and discretionary accruals in different stock market cycles and presents evidence about the discrepancy in prior research that investors were able to identify earnings management in some cases, but not in some other cases. We argue that investors&rsquo; reaction to the true nature of EPS changes may be different in different market cycles. We suggests that investors pay less attention to the nature of EPS changes in an optimistic cycle, and are more critical in neutral and pessimistic cycles. Therefore, investors are more likely to detect and count for any earnings management in a neutral or pessimistic cycle than in an optimistic cycle. Using the U.S. quarterly data from July 01, 1997 to June 29, 2001, three market cycles were identified: optimistic, neutral and pessimistic. The test results indicated that the association between discretionary accruals and abnormal stock returns were insignificant in the neutral market cycle, significant and positive in the optimistic cycle and significant and negative in the pessimistic cycle. These findings indicate that investors tend to ignore the income-increasing effect of discretionary accruals on EPS changes in an optimistic market. The finding suggests that a more delegate and technical analysis of EPS changes is required when earnings information is used for stock pricing. It also suggests that a consideration of market cycle effect on investors&rsquo; use of EPS could improve the earnings-based ratio analysis. The findings propose that researchers interested in investigating the association between stock prices and earnings management should control for the effect of the market cycle during which their samples are drawn. </span></span></p>

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

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 THE RECENCY EFFECT OF ACCOUNTING INFORMATION

2012 ◽  
Vol 6 (1) ◽  
pp. 85 ◽  
Author(s):  
Jogiyanto Hartono
Keyword(s):  
Stock Returns ◽  
Stock Prices ◽  
Recency Effect ◽  
Joint Effects ◽  
Announcement Effects ◽  
Earnings Information ◽  
Earnings Surprises ◽  
Belief Adjustment ◽  
Effect Hypothesis ◽  
With Memory

This study tests the joint effects of dividend and earnings information. A study of joint effects is justified for the following reasons. First, dividends and earnings are considered two of the most important signaling devices (Aharony and Swary 1980) that investors use in evaluating stock prices. Second, dividends and earnings are 'garbled' information (Ohlson 1989). Dividends and earnings may contain corroborating or disconfirming news. Third, investors may be have with memory, revising beliefs in complex ways in evaluating a sequence of information. Prior dividend studies that controlling for earnings announcement effects do not address these possibilities. Using Hogarth and Einhorn's (1992) belief-adjustment theory, this study models the behavior of investor reactions to joint dividend and earnings surprises. The theory predicts that order and timing of dividend and earnings surprises have different effects on stock returns. When dividend and earnings surprises have opposite signs (mixedevidence), the theory predicts that later surprises have a larger impact on stock returns than do earlier surprises (the recency effect hypothesis). The evidence for the recency  effect hypotheses is relatively strong. In three out of four cases of mixed evidence (positive earnings, negative earnings and positive dividend surprises), the recency effect hypotheses are supported.

Hedging on the Hill: Does Political Hedging Reduce Firm Risk?

2021 ◽  
Author(s):  
Dane M. Christensen ◽  
Hengda Jin ◽  
Suhas A. Sridharan ◽  
Laura A. Wellman
Keyword(s):  
Management Tool ◽  
Crash Risk ◽  
Partisan Politics ◽  
Return Volatility ◽  
Policy Uncertainty ◽  
Firm Risk ◽  
Income Volatility ◽  
Effective Tax Rate ◽  
Policy Proposal ◽  
Earnings Volatility

We examine whether firms’ political hedging activities are effective at mitigating political risk. Focusing on the risk induced by partisan politics, we measure political hedging as the degree to which firms’ political connections are balanced across Republican and Democratic candidates. We find that greater political hedging is associated with reduced stock return volatility, particularly during periods of higher policy uncertainty. Similarly, greater political hedging is associated with reduced crash risk, investment volatility, and earnings volatility. Moreover, the reduction in earnings volatility appears to relate to both a firm’s taxes and its operating activities, as we find that greater political hedging is associated with reduced cash effective tax rate volatility and pretax income volatility. We further find investors are better able to anticipate future earnings for firms that engage in political hedging, suggesting that political hedging helps improve firms’ information environments. Lastly, we perform an event study using President Obama’s Clean Power Plan. We find that on the days this policy proposal was debated in Congress, energy and utility firms experienced heightened intraday return volatility (relative to other firms and nonevent days). However, this heightened volatility is mitigated for energy and utility firms that are more politically hedged. Overall, we conclude that political hedging is an effective risk management tool that helps mitigate firm risk. This paper was accepted by Suraj Srinivasan, accounting.

Risk-Relevance of Fair-Value Income Measures for Commercial Banks

2006 ◽  
Vol 81 (2) ◽  
pp. 337-375 ◽  
Author(s):  
Leslie D. Hodder ◽  
Patrick E. Hopkins ◽  
James M. Wahlen
Keyword(s):  
Standard Deviation ◽  
Stock Returns ◽  
Commercial Banks ◽  
Fair Value ◽  
Net Income ◽  
Income Volatility ◽  
Expected Return ◽  
Market Pricing ◽  
Share Prices ◽  
Comprehensive Income

We investigate the risk relevance of the standard deviation of three performance measures: net income, comprehensive income, and a constructed measure of full-fair-value income for a sample of 202 U.S. commercial banks from 1996 to 2004. We find that, for the average sample bank, the volatility of full-fair-value income is more than three times that of comprehensive income and more than five times that of net income. We find that the incremental volatility in full-fair-value income (beyond the volatility of net income and comprehensive income) is positively related to marketmodel beta, the standard deviation in stock returns, and long-term interest-rate beta. Further, we predict and find that the incremental volatility in full-fair-value income (1) negatively moderates the relation between abnormal earnings and banks' share prices and (2) positively affects the expected return implicit in bank share prices. Our findings suggest full-fair-value income volatility reflects elements of risk that are not captured by volatility in net income or comprehensive income, and relates more closely to capital-market pricing of that risk than either net-income volatility or comprehensiveincome volatility.

The Accrual Accounting Principle and its Implications for Portuguese Tax Courts Decisions

2020 ◽  
Vol 0 (0) ◽  
Author(s):  
Daniel Taborda ◽  
João Sousa
Keyword(s):  
Tax Avoidance ◽  
Case Law ◽  
Tax Law ◽  
Income Transfer ◽  
Legal Decisions ◽  
Taxable Income ◽  
Principle Of Justice ◽  
Legal Arguments ◽  
Accounting Principle ◽  
Flexible Application

AbstractTo the best of our knowledge, this is the first paper focusing on the interpretations issued by different Portuguese courts concerning the application of the accrual principle established in the Corporate Income Tax Code.This paper uses a database of the Portuguese tax courts’ decisions and employs a case law-based research methodology to address the following question: under which circumstances the principle of justice may affect the strict application of the accrual principle? After collecting twenty-four legal decisions related to the application of the accrual principle outlined in tax law, this paper summarises eleven, grouping them according to the different issues under dispute. This analysis also includes the confrontation of the assumptions used by the tax authority and the claims of the taxpayers, identifying and discussing the legal arguments to override the strict application of the accrual principle.The main conclusion is that Portuguese courts may summon the principle of justice in taxation when taxpayers violate the accrual principle, in order to prevent unfair corrections to taxable income performed in tax audits. This paper found that the tax authority typically demands a rigid use of the accrual principle while the taxpayers often argue for a more flexible application. This last perspective has been adopted by the tax courts in certain circumstances, in particular when taxable income transfer was not motivated by tax avoidance.

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