Is tax-related information value relevant? Empirical study in the Canadian setting

Abstract

PurposeThis study aims at examining the value relevance of tax-related information in Canada. Tax-related information in this study includes taxable income, tax aggressiveness, and tax risk (i.e., unsustainable tax planning).Design/methodology/approachThis study analyzes the Canadian listed firms covering the period of 2012–2021 using the Feltham–Ohlson valuation model.FindingsThe findings are: (1) taxable income provides incremental value relevance information; (2) tax risk reduces the value relevance of both taxable income and accounting income and (3) tax aggressiveness reduces the value relevance of accounting income but not of taxable income. Further tests show that the COVID-19 pandemic increases the value relevance of taxable income but decreases the value relevance of accounting income. An analysis of the association between stock price volatility and tax-related information documents that taxable income and accounting income are both informative. Tax risk reduces the informativeness of taxable income, but tax aggressiveness and the pandemic do not.Research limitations/implicationsThe sample in this study covers the period up to 2021. Future research could use more recent data. Additionally, this study examines the Canadian setting. The results may not be generalized to other countries that have different accounting and tax rules.Originality/valueThis study sheds light on whether tax aggressiveness and tax risk affect the value relevance of taxable income and accounting income separately. In addition, to our knowledge, this is the first study that examines whether tax-related information is informative about stock price volatility.