2010 Volume 18 Issue 1 Pages 19-31
We investigate the relative and increment information content of taxable income in Japan. Extant research in U.S. shows that book income exhibits significantly greater relative explanatory power, while both income exhibit significant incremental explanatory power (i.e., taxable income also exhibit explanatory power). The focus of our research is how the information content of taxable income in Japan is changed on the tax reform act of 1998, using taxable income data which is publicly available rather than estimated amount. First, we find that taxable income exhibits significantly greater relative explanatory power after the tax reform act of 1998 while book income exhibits significantly greater relative explanatory power before 1998. In addition, taxable income exhibits significant incremental explanatory power in 9 of the 13 years and in all years after 1998. Second, we find that for firm-years with large book-tax differences (BTD), the incremental explanatory power of taxable income enhances after the tax reform act of 1998. Third, our results suggest that low earnings quality have distinct effects on the information content of taxable income. These findings are relevant to recent research examining book-tax differences as a measure of earnings quality and taxable income as a complementary performance measure, as well as the recent debate on book-tax conformity.
