Do Firms Use Tax Reserves to Meet Analysts’ Forecasts? Evidence from the Pre- and Post-FIN 48 Periods

53 Pages Posted: 23 Jul 2008 Last revised: 18 Mar 2015

See all articles by Sanjay Gupta

Sanjay Gupta

Michigan State University - Eli Broad College of Business

Rick Laux

Purdue University

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: March 10, 2015

Abstract

We examine whether firms use tax reserve decreases to meet analysts’ quarterly earnings forecasts in the period prior to the passage of FIN 48 and whether that behavior changed following the enactment of FIN 48. In the pre-FIN 48 period, we observe that firms reduce their tax reserves (i.e., increase income) when pre-managed earnings are below analysts’ forecasts. Specifically, we find that approximately 78% of firm-quarters that missed the earnings target without the benefit of the tax reserve decrease subsequently meet the earnings target after including the benefit. Further, we find that the amount of the decrease in the tax reserves is significantly associated with the magnitude of the deviation between pre-managed earnings and analysts’ forecasts. In contrast, in the post-FIN 48 period we do not find any evidence that firms use changes in the tax reserves to manage earnings around analysts’ forecasts. Thus, our results suggest that FIN 48 has, at least initially, curtailed earnings management through the tax reserves.

Keywords: Tax reserves; unrecognized tax benefits; FIN 48; earnings management; analysts’ forecasts

JEL Classification: H25, M41, M48, M49

Suggested Citation

Gupta, Sanjay and Laux, Rick C. and Lynch, Dan, Do Firms Use Tax Reserves to Meet Analysts’ Forecasts? Evidence from the Pre- and Post-FIN 48 Periods (March 10, 2015). Available at SSRN: https://ssrn.com/abstract=1163842 or http://dx.doi.org/10.2139/ssrn.1163842

Sanjay Gupta

Michigan State University - Eli Broad College of Business ( email )

632 Bogue Street, 520 BCC
East Lansing, MI 48824
United States
517-432-6488 (Phone)

HOME PAGE: http://www.broad.msu.edu/

Rick C. Laux (Contact Author)

Purdue University ( email )

Rawls Hall 4036
100 S. Grant Street
West Lafayette, IN 47906
United States

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

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