I examine the time-series pattern and value-relevance of tax expense by focusing on permanent tax differences ("PDs"), which are the difference between reported tax expense and pre-tax income taxed at the statutory rate. Prior research has found both a positive (profit proxy) and negative (cost) relationship between firm value and tax expense. I find that the effective tax rate ("ETR"), which is a function of PDs and pre-tax income, generally follows a reverting pattern and PDs are less persistent than pre-tax income. This pattern suggests that PDs (and therefore tax expense) should be less value-relevant than other net income. I regress annual stock returns against annual income changes and find that PD changes are less value-relevant than other net income changes. I also regress annual stock returns on net income and tax expense and find that, overall, tax expense is less value-relevant than other net income.
|Advisor:||Phillips, John D.|
|Commitee:||Eisdorfer, Assaf, Golec, Joseph H., Phillips, John D., Plesko, George A.|
|School:||University of Connecticut|
|School Location:||United States -- Connecticut|
|Source:||DAI-A 74/04(E), Dissertation Abstracts International|
|Keywords:||Tax expense, Taxes, Value relevance|
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