Browse > Article
http://dx.doi.org/10.13106/jafeb.2020.vol7.no9.271

Does Taxable Income under Full Disclosure of Earnings Provide Incrementally Useful Information to Investors?  

KIM, Joonhyun (College of Business Administration, Sangmyung University)
Publication Information
The Journal of Asian Finance, Economics and Business / v.7, no.9, 2020 , pp. 271-281 More about this Journal
Abstract
This study aims to investigate whether and why the disclosure of full financial information to estimate taxable income (TI) is incrementally useful for investors' decision making at earnings announcements. This paper shows analytically that the information content of TI beyond book income is determined by the relative informativeness of TI exceeding that of book-tax differences (BTDs), and therefore should be affected by the earnings quality of TI relative to BTDs. This study collects data on earnings announcements from Korean listed firms and employs multiple regression tests for earnings persistence, a major indicator of earnings quality, of TI and BTDs and their information content. The empirical test results show that TI is more persistent than BTDs for the entire sample in this study. Further, the investors' reaction to TI is greater than that to BTDs, and the market response to TI controlling for BI is positive. However, the market test results are significantly observed only in the subsample group with full disclosure of financial statements, not in the samples with disclosure of aggregated earnings only. In sum, this study provides new evidence that the TI information obtained from a detailed earnings announcement is useful for investors in addition to book income.
Keywords
Earnings Announcement; Taxable Income; Book Tax Difference; Disclosure Quality; Earnings Persistence;
Citations & Related Records
Times Cited By KSCI : 8  (Citation Analysis)
연도 인용수 순위
1 Dechow, P. M., & Dichev, I. D. (2002). The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors. The Accounting Review, 77(s-1), 35-59.   DOI
2 Dechow, P. M., Sloan, R. G., & Zha, J. (2014). Stock Prices and Earnings: A History of Research. Annual Review of Financial Economics, 6(1), 343-363.   DOI
3 DeFond, M., Hung, M., & Trezevant, R. (2007). Investor Protection and the Information Content of Annual Earnings Announcements: International Evidence. Journal of Accounting and Economics, 43(1), 37-67.   DOI
4 Desai, M. A. (2005). The Degradation of Reported Corporate Profits. The Journal of Economic Perspectives, 19(4), 171-192.   DOI
5 Diamond, D. W., & Verrecchia. R. E. (1991). Disclosure, Liquidity, and the Cost of Capital. The journal of Finance, 46(4), 1325-1359.   DOI
6 Easton, P. D., & Zmijewski, M. E. (1989). Cross-sectional Variation in the Stock Market Response to Accounting Earnings Announcements. Journal of Accounting and Economics, 11(2-3), 117-141.   DOI
7 Ertimur, Y., Livnat, J., & Martikainen, M. (2003). Differential Market Reactions to Revenue and Expense Surprises. Review of Accounting Studies, 8(2), 185-211.   DOI
8 Dang, H. N., Nguyen, T. T. C., & Tran, D. M. (2020). The Impact of Earnings Quality on Firm Value: The Case of Vietnam. Journal of Asian Finance, Economics, and Business, 7(3), 63-72. https://doi.org/10.13106/jafeb.2020.vol7.no3.63   DOI
9 Francis, J., Schipper, K., & Vincent, L. (2002). Expanded Disclosures and the Increased Usefulness of Earnings Announcements. The Accounting Review, 77(3), 515-546.   DOI
10 Hanlon, M. (2005). The Persistence and Pricing of Earnings, Accruals, and Cash Flows When Firms Have Large Book-Tax Differences. The Accounting Review, 80(1), 137-166.   DOI
11 Landsman, W. R., Maydew, E. L., & Thornock, J. R. (2012). The Information Content of Annual Earnings Announcements and Mandatory Adoption of IFRS. Journal of Accounting and Economics, 53(1), 34-54.   DOI
12 Hanlon, M., Laplante, S. K., & Shevlin, T. (2005). Evidence for the Possible Information Loss of Conforming Book Income and Taxable Income. The Journal of Law and Economics, 48(2), 407-442.   DOI
13 Jackson, M. (2015). Book-Tax Differences and Future Earnings Changes. The Journal of the American Taxation Association, 37(2), 49-73.   DOI
14 Jennings, R. (1990). A Note on Interpreting Incremental Information Content. The Accounting Review, 65(4), 925-932.
15 Kim, J. H., & Kim, I. H. (2017). What Really Determines the Information Content of Tax Expense and Deferred Tax? Korean Accounting Review, 42(2), 1-44.
16 Kormendi, R., & Lipe, R. (1987). Earnings Innovations, Earnings Persistence, and Stock Returns. Journal of Business, 60(3), 323-345.   DOI
17 Lee, J., Lee, S. J., Choi, S., & Kim, S. (2020). The Usefulness of Other Comprehensive Income for Predicting Future Earnings. Journal of Asian Finance, Economics, and Business, 7(5), 31-40. https://doi.org/10.13106/jafeb.2020.vol7.no5.031   DOI
18 Lev, B., & Nissim, D. (2004). Taxable Income, Future Earnings, and Equity Values. The Accounting Review, 79(4), 1039-1074.   DOI
19 Lisowsky, P. (2009). Inferring US Tax Liability from Financial Statement Information. Journal of the American Taxation Association, 31(1), 29-63.   DOI
20 Livnat, J., & Zarowin, P. (1990). The incremental information content of cash-flow components. Journal of Accounting and Economics, 13(1), 25-46.   DOI
21 Mayberry, M. A., McGuire, S. T., & Omer, T. C. (2015). Smoothness and the Value Relevance of Taxable Income. The Journal of the American Taxation Association, 37(2), 141-167.   DOI
22 Park, H. J., Jung, S. Y., & Ko, J. K. (2015). Book-Tax Conformity, Consistency of Book-Tax Differences and the Information Content of Earnings. Korean Accounting Review, 40(5), 171-223. [Printed in Korean].
23 Ayers, B. C., Jiang, J., & Laplante. S. K. (2009). Taxable Income as a Performance Measure: The Effects of Tax Planning and Earnings Quality. Contemporary Accounting Research, 26(1), 15-54.   DOI
24 Baik, B., Kim, Y. J., & Lee, J. (2012). A Study on the Exact Timing of Annual Earnings Announcements in the Korean Market. Korean Accounting Review, 37(4), 253-293. [Printed in Korean].
25 Nam, H.-J. (2019). The effect of earnings quality on financial analysts' dividend forecast accuracy: Evidence from Korea. Journal of Asian Finance, Economics and Business, 6(4), 91-98. https://doi.org/10.13106/jafeb.2019.vol6.no4.91   DOI
26 Nichols, D. G., & Wahlen, J. M. (2004). How Do Earnings Numbers Relate to Stock Returns? A Review of Classic Accounting Research with Updated Evidence. Accounting Horizons, 18(4), 263-286.   DOI
27 Oh, K.-W., & Ki, E.-S. (2020). Effect of Tax-Related Information on Pre-Tax Income Forecast and Value Relevance. Journal of Asian Finance, Economics and Business, 7(1), 81-90. https://doi.org/10.13106/jafeb.2020.vol7.no1.81   DOI
28 Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. The Review of Financial Studies, 22(1), 435-480.   DOI
29 Shevlin, T. (2002). Commentary: Corporate Tax Shelters and Book-Tax Differences. Tax Law Review, 55, 427-443.
30 Sloan, R. G. (1996). Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings? The Accounting review, 71(3), 289-315.
31 Swaminathan, S., & Weintrop, J. (1991). The Information Content of Earnings, Revenues, and Expenses. Journal of Accounting Research, 29(2), 418-427.   DOI
32 Chen, L. H., Dhaliwal, D. S., & Trombley, M. A. (2012). Consistency of Book-Tax Differences and the Information Content of Earnings. The Journal of the American Taxation Association, 34(2), 93-116.   DOI
33 Tang, T., & Firth, M. (2011). Can Book-Tax Differences Capture Earnings Management and Tax Management? Empirical Evidence from China. The International Journal of Accounting, 46(2), 175-204.   DOI
34 Basu, S., Duong, T. X., Markov, S., & Tan, E. J. (2013). How important are earnings announcements as an information source?. European Accounting Review, 22(2), 221-256.   DOI
35 Beaver, W. H., McNichols, M. F., & Wang, Z. Z. (2018). The information content of earnings announcements: new insights from intertemporal and cross-sectional behavior. Review of Accounting Studies, 23(1), 95-135.   DOI
36 Blaylock, B., Shevlin, T., & Wilson, R. J. (2012). Tax Avoidance, Large Positive Temporary Book-Tax Differences, and Earnings Persistence. The Accounting Review, 87(1), 91-120.   DOI
37 Botosan, C. A. (1997). Disclosure Level and the Cost of Equity Capital. The Accounting Review, 72(3), 323-349.
38 Chambers, A. E., & Penman, S. H. (1984). Timeliness of Reporting and the Stock Price Reaction to Earnings Announcements. Journal of Accounting Research, 22(1), 21-47.   DOI
39 Chen, S., DeFond, M. L., & Park, C. W. (2002). Voluntary disclosure of balance sheet information in quarterly earnings announcements. Journal of Accounting and Economics, 33(2), 229-251.   DOI
40 Collins, D. W., & Kothari, S. P. (1989). An Analysis of Intertemporal and Cross-Sectional Determinants of Earnings Response Coefficients. Journal of Accounting and Economics, 11(2-3), 143-181.   DOI
41 Comprix, J., Graham, R. C., & Moore, J. A. (2011). Empirical Evidence on the Impact of Book-Tax Differences on Divergence of Opinion among Investors. The Journal of the American Taxation Association, 33(1), 51-78.   DOI