Taxable income, future earnings, and equity values.

ABSTRACT: We investigate the ability of a tax-based fundamental--the ratio of tax-to-book income--to predict earnings extension and stock returns and to explain the earnings-price ratio. This tax fundamental mirrors both temporary and permanent book-tax differences as well as tax accruals, of the like kind as changes in the tax valuation allowance. We find that the tax-to-book income ratio predicts posterior five-year earnings changes, both before and after the implementation of Statement of Financial Accounting Standards (SFAS) No. 109 in 1993 For the pra-SFAS No. 109 period, the tax information is unrelated to contemporaneous earnings-price ratios and powerfully related to subsequent stock go [i]or[/i] come backs Conversely, ...