Valuation of tax expense
Published online: 27 December 2013
Ó Springer Science+Business Media New York 2013
Abstract As tax expense reﬂects value lost to taxes paid, it should be negatively
associated with value, provided nontax, value-relevant information is controlled for.
However, valuation regressions estimated in prior research—using contemporane-
ous tax expense and nontax variables—document substantial variation in the
coefﬁcients on tax expense, ranging from signiﬁcant negative to signiﬁcant positive
values. We show this variation is (a) caused by the omission of expected future
proﬁtability, and (b) explained by many factors that cause variation in the corre-
lations among included variables and omitted future proﬁtability. Unfortunately,
difﬁculties associated with separating the impact of individual factors hampers tax
research investigating determinants of the value relevance of tax expense.
Keywords Tax expense Á Stock return Á Proﬁtability Á Value relevance Á
JEL G12 Á G14 Á M41 Á H25
We re-examine the value implications of tax expense, an important focus of the
emerging literature on accounting for income taxes or AFIT (e.g., Graham et al.
2012). Prior work in this area—based typically on regressions of price levels
(returns) on levels of (surprises in) tax expense and relevant nontax variables—
investigates two unrelated ways in which tax expense maps into value. First, tax
J. Thomas Á F. Zhang (&)
Yale School of Management, Yale University, P.O. Box 208200, New Haven, CT 06520, USA
Rev Account Stud (2014) 19:1436–1467