Do Firms That Receive Non-Income Tax Relief Outperform?

A study looked at whether a corporate reduction in taxes not based on income has an impact on the stock’s performance.

Non-income tax relief is a type of government incentive program that reduces taxes collected on a base other than a firm’s income. Non-income taxes are a large portion of a company’s overall tax load. Additionally, non-income taxes do not affect pretax income.

Non-income tax relief is not reported separately in financial statements; therefore, its effect on future stock prices is not well understood. To examine the relationship between non-income tax relief and future firm performance and stock returns, the study looked at historical data assembled by Good Jobs First (GJF), a nonprofit group that tracks government subsidies.

The researchers argue that non-income tax relief should be a key factor for investors because it may provide insight into the firm’s future performance. Non-income tax relief can decrease non-income tax expenses, which directly affects accounting performance. In addition, the private information about a firm that is shared with the government in order to obtain the tax relief can give hints about the firm’s prospects and management’s ability to maximize the relief benefit received.

It is worth noting that firms receiving non-income tax relief tend to be large and mature with high levels of capital expenditure. Additionally, these companies tend to have better performance measured by pretax income, sales and returns, which generates analyst interest.

The study’s outcomes show that future sales are significantly higher for firms receiving non-income tax relief compared to those not receiving these reductions. They further found that abnormal returns associated with the relief tend to cluster around future earnings information events. In combination, this evidence suggests to the researchers that non-income tax relief is value-relevant but is incorporated into prices over time. However, they advise that additional research needs to be carried out to better understand what factors influence the market price.

Source: “The Relevance of Non-Income Tax Relief,” by Michael S. Drake, Ryan V. Hess, Jaron H. Wilde and Braden M. Williams; Contemporary Accounting Research, Fall 2022.