Forecasting Taxes: New Evidence from Analysts

Posted: 20 Dec 2014 Last revised: 10 Dec 2017

See all articles by Brian Bratten

Brian Bratten

University of Kentucky - Von Allmen School of Accountancy

Cristi A. Gleason

University of Iowa - Department of Accounting

Stephannie Larocque

University of Notre Dame - Mendoza College of Business

Lillian F. Mills

University of Texas at Austin - McCombs School of Business

Date Written: July 7, 2016

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

Suggested Citation

Bratten, Brian and Gleason, Cristi A. and Larocque, Stephannie A. and Mills, Lillian F., Forecasting Taxes: New Evidence from Analysts (July 7, 2016). Accounting Review, Vol. 92, No. 3, p. 1-29, 2017, Available at SSRN: https://ssrn.com/abstract=2540644 or http://dx.doi.org/10.2139/ssrn.2540644

Brian Bratten

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
859-257-1947 (Phone)

HOME PAGE: http://gatton.uky.edu/faculty-research/departments/von-allmen-school-accountancy/directory

Cristi A. Gleason (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

Stephannie A. Larocque

University of Notre Dame - Mendoza College of Business ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Lillian F. Mills

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

Austin, TX 78712
United States

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