This research tests for persistence in tax generated earnings changes. Earnings persistence is indicated by the capitalization of earnings by securities markets. This research disaggregates accounting earnings and examines the security markets’ evaluation of the relative permanence or transience of the component of earnings resulting from revenue law changes. Two proxies for tax generated earnings changes are evaluated though an examination of earnings response coefficients.

The results indicate that tax generated earnings changes are not expected to persist beyond two accounting periods, and may reflect the ability of firms to manage tax earnings.