Forecasting Taxes: New Evidence from Analysts

Abstract

We provide new evidence about how analysts incorporate and improve on management ETR forecasts. Quarterly ETR reporting under the integral method provides mandatory point-estimate forecasts by management, but firms must record certain “discrete” tax items fully in the quarter they occur, polluting these forecasts. We investigate management ETR accuracy, analysts’ decisions to mimic management’s estimate, analysts’ accuracy relative to each other or to management, and dispersion. Our comprehensive analysis reveals analysts deviate from management more and are more accurate relative to management as complexity increases, with real effects on EPS accuracy and dispersion. In contrast to prior research that analysts ignore or are confused by taxes, we provide evidence that analysts pay attention to taxes and improve on management estimates. Based on our evidence that management’s quarterly ETRs have less predictive value in the presence of discrete items, we suggest standard-setters re-examine the discrete item exception to require more disclosure.

Keywords: Analysts, Income tax, ETR forecasts, Accuracy, Dispersion, Integral method

JEL Classification: G29, M41, M49