The Effect of Analysts' Disaggregated Forecasts on Investors and Managers: Evidence Using Pre-Tax Forecasts
Posted: 8 Jun 2014 Last revised: 26 Sep 2018
Date Written: July 23, 2018
I examine whether analysts' tax forecasts are informative to investors and whether analysts' tax forecasts impact firm behavior. Using I/B/E/S data from 2002-2014, I find that investors utilize both analysts' pre- and after-tax earnings forecasts in evaluating firm performance, indicating analysts' tax forecasts are value-relevant. Furthermore, evidence that investors discount earnings management through the income tax expense is limited to firms with tax forecast coverage. In examining the impact of analysts' tax forecasts on firm behavior, I find analysts' tax forecast coverage is positively associated with quantitative and qualitative tax footnote disclosure. The results suggest that analysts' tax forecasts are value-relevant and that analysts' tax coverage impacts firm decisions related to the income tax expense account. This evidence informs academics and practitioners as to the role of analysts' tax forecasts.
Keywords: Analyst Forecast, Earnings Management, Income Tax Expense
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