Abstract

Korean GAAP has been greatly changed twice to improve accounting transparency and harmonize with global standards after the Asian financial crisis. GAAP changes lowered the high conformity of GAAP and tax law, and might change the informativeness of book income and taxable income. This study investigates the effect of GAAP changes of the end of 1998 and after 2003 on the informativeness of book income and taxable income focusing on the association of performance measures and stock returns. According to the analysis of 2,712 firm－year from 2000 to 2005, GAAP changes after 2003 increased the separative informativeness of book income, but did not increase incremental informativeness of book income. However, GAAP changes increased separative and incremental informativeness of taxable income. The increased informativeness of taxable income implied that investors consider taxable income as a benchmark when they evaluate book income. These results are robust about excluding loss firms or introducing control variables, and the informativeness of taxable income increases with earnings management firms. According to the result of analyzing 2,340 firm－year from 1996 to 2000, GAAP changes of the end of 1998 did not increase separative and incremental informativeness of book income and incremental informativeness of taxable income. However, separative informativeness of taxable income decreased after the GAAP changes, but it disappeared when loss firms were excluded or control variables were considered. Earnings management being controlled, separative and incremental informativeness of taxable income decreased with earnings management firms. This study examined the benefit of GAAP changes analyzing the informativeness of book income and taxable income in the stock market, and the results may be useful to review the effect of the adoption of IFRS, which will start from 2011, on the investors and stock market.

Keywords

• GAAP changes
• book income
• taxable income
• informativeness

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