Bias in Quarterly Estimates of Annual Effective Tax Rates and Earnings Management

Journal of the American Taxation Association, Vol. 34, No. 1, 2012

Posted: 17 May 2012

See all articles by Joseph Comprix

Joseph Comprix

Syracuse University

Lillian F. Mills

University of Texas at Austin - McCombs School of Business

Andrew Schmidt

North Carolina State University

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2012

Abstract

We investigate whether quarterly annual effective tax rate (ETR) estimates are systematically biased in comparison to year-end actual ETRs. We find that estimated annual ETRs in the first, second, and third quarters are systematically higher than year-end ETRs. We then investigate whether firms’ overstatement of quarterly ETRs creates slack that is used for earnings management. We find that quarterly ETR increases are more likely to be reversed in subsequent quarters when firms would have missed their analysts’ earnings forecast absent the reversal. Finally, we show that in the years subsequent to the passage of the Sarbanes-Oxley Act (SOX), changes in the ETR continue to be associated with earnings management. These results documenting patterns of annual ETR estimates and revisions contribute to research about how earnings management is accomplished.

Keywords: Earnings Management, Effective Tax Rates, Quarterly Earnings

JEL Classification: H25, M41

Suggested Citation

Comprix, Joseph and Mills, Lillian F. and Schmidt, Andrew P., Bias in Quarterly Estimates of Annual Effective Tax Rates and Earnings Management (March 1, 2012). Journal of the American Taxation Association, Vol. 34, No. 1, 2012, Available at SSRN: https://ssrn.com/abstract=2061794

Joseph Comprix

Syracuse University ( email )

Whitman School of Management
721 University Avenue
Syracuse, NY 13244-2450
United States
315-443-3674 (Phone)
315-442-1461 (Fax)

Lillian F. Mills

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Andrew P. Schmidt (Contact Author)

North Carolina State University ( email )

Raleigh, NC 27695-8113
United States

HOME PAGE: http://https://poole.ncsu.edu/people/apschmid/

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