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Soc. Sci. 2018, 7(11), 212; https://doi.org/10.3390/socsci7110212

Volatilities of Book Income and Taxable Income and Their Risk Relevance

School of Business, Hanyang University, Seoul 133-791, Korea
Received: 30 September 2018 / Revised: 23 October 2018 / Accepted: 26 October 2018 / Published: 29 October 2018
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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. View Full-Text
Keywords: earnings volatility; book income; taxable income; stock returns; firm risk earnings volatility; book income; taxable income; stock returns; firm risk
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).
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Kim, J. Volatilities of Book Income and Taxable Income and Their Risk Relevance. Soc. Sci. 2018, 7, 212.

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