Equity Price Reaction to the Pronouncements Related to Accounting for Income Taxes

This study examines the equity price reaction to two generally income increasing standards on accounting for income taxes, namely the Statements on Financial Accounting Standards (SFAS) No. 96 and No. 109. It is hypothesized that significant positive abnormal returns should be observed around the Exposure Draft dates. It is also hypothesized that the equity price reaction to these standards should be related to the magnitude of their income effects and the economic consequences of a given income effect. The results are consistent with contracting and political cost hypotheses.