IDEAS home Printed from https://ideas.repec.org/a/gam/jscscx/v7y2018i11p212-d178945.html
   My bibliography  Save this article

Volatilities of Book Income and Taxable Income and Their Risk Relevance

Author

Listed:
  • Joonhyun Kim

    (School of Business, Hanyang University, Seoul 133-791, Korea)

Abstract

This study investigates the volatility of book income and taxable income, and their relevance to stock returns variability. Book income is recognized under the financial accounting principle whereas taxable income is determined on the basis of legal right. Thus, the two types of earnings can provide different sets of information to investors. Particularly related to the role of earnings as a risk measure, this study shows that book income is more volatile than taxable income, which indicates that taxable income is relatively more consistent and predictable. Further, the volatility of book income is strongly positively related to stock return variability while the taxable income volatility is insignificantly associated with the stock returns volatility. Additional analysis shows that the earnings volatility is more closely linked to the systematic risk of stock prices than the idiosyncratic risk. In conclusion, this study suggests that book income and taxable income is mutually different in terms of earnings variability and its relevance to firm risk. The findings also indicate that those two sets of earnings information are complementary to each other and provides investors with useful information to assess underlying firm risk.

Suggested Citation

  • Joonhyun Kim, 2018. "Volatilities of Book Income and Taxable Income and Their Risk Relevance," Social Sciences, MDPI, vol. 7(11), pages 1-14, October.
  • Handle: RePEc:gam:jscscx:v:7:y:2018:i:11:p:212-:d:178945
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2076-0760/7/11/212/pdf
    Download Restriction: no

    File URL: https://www.mdpi.com/2076-0760/7/11/212/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Reinganum, Marc R., 1981. "A New Empirical Perspective on the CAPM," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 439-462, November.
    2. Liu, Jianan & Stambaugh, Robert F. & Yuan, Yu, 2018. "Absolving beta of volatility’s effects," Journal of Financial Economics, Elsevier, vol. 128(1), pages 1-15.
    3. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
    4. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    5. Campbell, John Y. & Giglio, Stefano & Polk, Christopher & Turley, Robert, 2018. "An intertemporal CAPM with stochastic volatility," Journal of Financial Economics, Elsevier, vol. 128(2), pages 207-233.
    6. Khan, Shahwali & Bradbury, Michael E., 2014. "Volatility and risk relevance of comprehensive income," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(1), pages 76-85.
    7. Barth, Mary E. & Landsman, Wayne R. & Wahlen, James M., 1995. "Fair value accounting: Effects on banks' earnings volatility, regulatory capital, and value of contractual cash flows," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 577-605, June.
    8. Benjamin C. Ayers & John (Xuefeng) Jiang & Stacie K. Laplante, 2009. "Taxable Income as a Performance Measure: The Effects of Tax Planning and Earnings Quality," Contemporary Accounting Research, John Wiley & Sons, vol. 26(1), pages 15-54, March.
    9. Ball, R & Brown, P, 1968. "Empirical Evaluation Of Accounting Income Numbers," Journal of Accounting Research, Wiley Blackwell, vol. 6(2), pages 159-178.
    10. Ball, Ray & Sadka, Gil, 2015. "Aggregate earnings and why they matter," Journal of Accounting Literature, Elsevier, vol. 34(C), pages 39-57.
    11. Hanlon, Michelle & Laplante, Stacie Kelley & Shevlin, Terry, 2005. "Evidence for the Possible Information Loss of Conforming Book Income and Taxable Income," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 407-442, October.
    12. Dichev, Ilia D. & Tang, Vicki Wei, 2009. "Earnings volatility and earnings predictability," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 160-181, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bradley Blaylock & Bradley P. Lawson & Michael A. Mayberry, 2020. "Taxable income, future profitability, and stock returns," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(7-8), pages 858-881, July.
    2. Atwood, T.J. & Drake, Michael S. & Myers, Linda A., 2010. "Book-tax conformity, earnings persistence and the association between earnings and future cash flows," Journal of Accounting and Economics, Elsevier, vol. 50(1), pages 111-125, May.
    3. Yaniv Konchitchki & Yan Luo & Mary L. Z. Ma & Feng Wu, 2016. "Accounting-based downside risk, cost of capital, and the macroeconomy," Review of Accounting Studies, Springer, vol. 21(1), pages 1-36, March.
    4. Bård Misund, 2016. "Vertical integration and value-relevance: Empirical evidence from oil and gas producers," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1264107-126, December.
    5. Alsuhaibani, Waleed & Houmes, Robert & Wang, Daphne, 2023. "The evolution of financial reporting quality for companies listed on the Tadawul Stock Exchange in Saudi Arabia: New emerging markets' evidence," Emerging Markets Review, Elsevier, vol. 55(C).
    6. Audrey Hsu & Sophia Liu, 2023. "The effect of book-tax conformity on the information environment: from the analyst perspective," Review of Quantitative Finance and Accounting, Springer, vol. 61(2), pages 535-565, August.
    7. Karampinis, Nikolaos I. & Hevas, Dimosthenis L., 2013. "Effects of IFRS Adoption on Tax-induced Incentives for Financial Earnings Management: Evidence from Greece," The International Journal of Accounting, Elsevier, vol. 48(2), pages 218-247.
    8. Preeti Choudhary & Allison Koester & Terry Shevlin, 2016. "Measuring income tax accrual quality," Review of Accounting Studies, Springer, vol. 21(1), pages 89-139, March.
    9. Fargher, Neil & Wee, Marvin, 2019. "The impact of Ball and Brown (1968) on generations of research," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 55-72.
    10. Ji-Hye Park & Joong-Seok Cho, 2016. "The Effect of Earnings Recognition on Firm-Specific Information Variation," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 386-391.
    11. Tahat, Yasean A. & Alhadab, Mohammad, 2017. "Have accounting numbers lost their value relevance during the recent financial credit crisis?," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 182-191.
    12. S. P. Kothari & Charles Wasley, 2019. "Commemorating the 50‐Year Anniversary of Ball and Brown (1968): The Evolution of Capital Market Research over the Past 50 Years," Journal of Accounting Research, Wiley Blackwell, vol. 57(5), pages 1117-1159, December.
    13. Mingjun Zhou, 2012. "Value Relevance Of Book And Tax Income: A Macroeconomic Conditions Perspective," Accounting & Taxation, The Institute for Business and Finance Research, vol. 4(2), pages 1-12.
    14. Mona A. ElBannan & Omar Farooq, 2019. "When are earnings informative?," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 12(3), pages 388-406, June.
    15. Jacob Thomas & Frank X. Zhang, 2011. "Tax Expense Momentum," Journal of Accounting Research, Wiley Blackwell, vol. 49(3), pages 791-821, June.
    16. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    17. Pavol Durana & Lucia Michalkova & Andrej Privara & Josef Marousek & Milos Tumpach, 2021. "Does the life cycle affect earnings management and bankruptcy?," Oeconomia Copernicana, Institute of Economic Research, vol. 12(2), pages 425-461, June.
    18. Karel Janda, 2019. "Earnings Stability and Peer Company Selection for Multiple Based Indirect Valuation," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 69(1), pages 37-75, February.
    19. Luis Manuel Tovar Rocha & Julio Téllez Pérez & Gabriel Alberto Agudelo Torres, 2022. "The Relationship Between Share Prices and DUPONT Model Components: Evidence from Mexican Stock Market," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 17(1), pages 1-13, Enero - M.
    20. Yiting Cao & Qi (Flora) Dong, 2020. "Does reporting position affect the pricing of the volatility of comprehensive income?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1113-1150, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jscscx:v:7:y:2018:i:11:p:212-:d:178945. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.