Premium
Tax Expense Momentum
Author(s) -
THOMAS JACOB,
ZHANG FRANK X.
Publication year - 2011
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/j.1475-679x.2011.00409.x
Subject(s) - earnings surprise , economics , earnings , profitability index , monetary economics , proxy (statistics) , post earnings announcement drift , deferred tax , tax credit , tax reform , financial economics , econometrics , earnings response coefficient , state income tax , finance , public economics , gross income , machine learning , computer science
We investigate the joint hypothesis that (1) tax expense contains information about core profitability that is incremental to reported earnings and (2) that information is reflected in stock prices with a delay. We find that seasonally differenced quarterly tax expense, our proxy for tax expense surprise, is related positively to future returns. This anomaly is separate from previously documented pricing anomalies based on financial and tax variables. Additional investigation reveals that tax expense surprise is related positively to changes in future quarterly earnings and tax expense, and both those future changes are related positively to future returns. While the returns to investing in predictable future earnings changes has been documented before, these results suggest that predicting changes in future tax expense also generates incremental future returns.