Tax Expense Surprises and Future Returns
We investigate whether surprises in quarterly tax expense predict future returns, after controlling for surprises in after-tax book income. We find that seasonally-differenced quarterly tax expense, our proxy for tax expense surprise, is positively related to future returns over the next two quarters. We confirm that this anomalous link is separate from other anomalies documented in the prior literature, such as size, book-to-market, accruals, and price momentum, as well as two anomalies related to tax variables. While higher expense might intuitively imply bad news, in this case higher tax expense signals good news as it is positively related to pre and after-tax income. Our results suggest that this good news is incorporated in stock prices with a delay because investors do not recognize fully the ability of tax expense surprises to predict two key variables that are released in the next two quarters - future book income and future tax expense.
|Date of creation:||01 Dec 2007|
|Date of revision:||01 Feb 2008|
|Contact details of provider:|| Web page: http://icf.som.yale.edu/|
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
- Ball, Ray & Bartov, Eli, 1996. "How naive is the stock market's use of earnings information?," Journal of Accounting and Economics, Elsevier, vol. 21(3), pages 319-337, June.
- Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. " Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
- X. Frank Zhang, 2006. "Information Uncertainty and Stock Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 105-137, 02.
- Jeffrey T. Doyle & Russell J. Lundholm & Mark T. Soliman, 2006. "The Extreme Future Stock Returns Following I/B/E/S Earnings Surprises," Journal of Accounting Research, Wiley Blackwell, vol. 44(5), pages 849-887, December.
- Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
- George A. Plesko, 2007. "Estimates of the Magnitude of Financial and Tax Reporting Conflicts," NBER Working Papers 13295, National Bureau of Economic Research, Inc.
- Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
When requesting a correction, please mention this item's handle: RePEc:ysm:somwrk:amz2531. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.