UC Irvine

ABSTRACT We examine whether estimated taxable income provides incremental information about firms' operating risk. We develop taxable income-based measures that should be useful in assessing risk in a simple earnings predictability model. In our empirical tests these taxable income-based measures explain cross-sectional variation in the predictability and variability of future pre-tax financial performance. Further, these measures are associated with predictable variation in market-based measures of firm risk. Our findings shed light on how accounting information—specifically, book income and tax income—impacts investors' assessment of firm risk as well as improving our understanding of the extent and nature of information contained in estimated taxable income.