Analysts, Taxes, and the Information Environment
44 Pages Posted: 20 Aug 2014 Last revised: 25 Apr 2019
Date Written: April 12, 2019
This paper investigates the extent to which analysts incorporate tax-based earnings information into their earnings forecasts relative to other earnings information. We find that analysts’ mis-reaction to tax-based earnings information is distinct from their mis-reaction to other (non-tax) accounting information, on average. We then show that analysts differ in their mis-estimation of tax and other (non-tax) earnings components only when firms have weak information environments; when firms have strong information environments, analyst forecasts fully incorporate tax-based earnings information and exhibit no difference incorporating tax-based earnings information relative to other accounting information. Our evidence suggests that, on average, forecasting tax-based earnings information is more difficult for analysts relative to forecasting other accounting information. However, access to appropriate information and resources enables analysts to better process tax information. Overall, we contribute to the literature by providing a more complete understanding of the source of analyst tax-related forecast errors.
Keywords: Analysts, Taxes, Information Environments
JEL Classification: H25, M41, D82, G14
Suggested Citation: Suggested Citation