Pre-Tax Income Forecasts and Tax Avoidance
70 Pages Posted: 27 Feb 2013 Last revised: 10 Sep 2013
Date Written: September 9, 2013
When analysts issue both earnings and pre-tax income forecasts, they implicitly provide a forecast of income tax expense. We find that these pre-tax income forecasts have a negative (positive) effect on corporate tax avoidance for firms with relatively aggressive (non-aggressive) tax policy. We also find evidence that analysts providing implicit income tax expense forecasts have more accurate earnings forecasts and have a better appreciation of how tax expense affects future earnings. Overall, these results suggest that analysts’ implicit tax expense forecasts increase transparency and play an important role in deterring both overly aggressive and overly conservative corporate tax avoidance.
Keywords: Pre-tax Income Forecasts, Disaggregated Forecasts, Tax Avoidance, Analysts’ Forecasts
JEL Classification: G32, G34
Suggested Citation: Suggested Citation