Taxable Income as a Performance Measure: The Effects of Tax Planning and Earnings Quality*

Abstract

Extant research suggests that book-tax differences are useful measures in evaluating firm performance. There is little evidence, however, regarding taxable income as an alternative performance measure to book income. We examine firm characteristics that mitigate or enhance the ability of taxable income to inform investors regarding firm performance. We find that the relative and incremental information content of estimated taxable income to book income is lower for high tax planning firms and higher for low earnings quality firms. Our results suggest that tax planning and low earnings quality have contrasting effects on the information content of estimated taxable income. These findings are pertinent to recent research examining book-tax differences as a measure of earnings quality and taxable income as an alternative performance measure.