The Effect of Temporary Tax Laws on Understanding and Predicting Corporate Earnings
48 Pages Posted: 11 Oct 2015 Last revised: 18 Feb 2018
Date Written: February 15, 2018
This paper investigates the extent to which the expiration of a temporary tax law makes corporate earnings harder to predict and understand. Examining evidence from eight separate expirations of the R&D tax credit, I find that analysts’ forecast errors and abnormal volume increase surrounding quarterly earnings announcements for firms affected by the R&D tax credit. These increases suggest difficulties in forecasting and understanding earnings for R&D credit firms when the R&D tax credit is expired. In additional analysis, I find some evidence that the reason for the difficulty in prediction is a lack of information. The results of this study call attention to previously unexplored consequences of temporary tax laws, namely their ability to affect corporate earnings.
Keywords: earnings predictability, temporary tax law, R&D tax credit
JEL Classification: G38, G18, M41, H25, K34
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