Date of Completion
4-30-2014
Embargo Period
4-25-2014
Keywords
Valuation of tax expense; variance decomposition; discount rate news.
Major Advisor
George Plesko
Associate Advisor
David Weber
Associate Advisor
Assaf Eisdorfer
Field of Study
Business Administration
Degree
Doctor of Philosophy
Open Access
Open Access
Abstract
I investigate the information content of income tax expense using variance decomposition to separate stock returns into cash flow and discount rate news components. While prior literature has focused on linking tax expense with expected future cash flows, I provide arguments for why tax expense should also be informative about firm risk. Consistent with these arguments, my results indicate that the previously documented positive association between firm-level tax expense surprises and contemporaneous stock returns is driven in part by discount rate news. I then extend the firm-level analyses to the stock market level to determine whether tax is useful for market valuation and whether the firm-level discount rate news is idiosyncratic or systematic in nature. My results show that aggregate tax expense surprises contain information associated with increased macroeconomic risk. This result also suggests that the information in a firm’s tax expense surprise is reflective of priced idiosyncratic risk.
Recommended Citation
Henry, Erin, "The Information Content of Tax Expense: A Firm- and Market-Level Return Decomposition" (2014). Doctoral Dissertations. 356.
https://digitalcommons.lib.uconn.edu/dissertations/356