Analysts’ Pre-Tax Income Forecasts and the Tax Expense Anomaly

Posted: 30 May 2016

See all articles by Bok Baik

Bok Baik

Seoul National University

Kyonghee Kim

Michigan State University

Richard M. Morton

Florida State University - Department of Accounting

Yongoh Roh

New York University (NYU), Leonard N. Stern School of Business

Date Written: May 28, 2016

Abstract

This paper examines whether analysts’ pre-tax income forecasts mitigate the tax expense anomaly documented by Thomas and Zhang (J Account Res 49:791–821, 2011). They find that seasonal changes in quarterly income tax expense are positively related to future returns after controlling for the earnings surprise and conclude that investors underreact to value-relevant information in tax expense. When analysts issue both earnings and pre-tax income forecasts, they implicitly provide a forecast of income tax expense. We posit that this implicit forecast helps investors recognize the persistence of current tax expense surprise for future earnings. Accordingly, we expect that mispricing of tax expense will be less severe for firms with earnings and pre-tax income forecasts. As expected, we find that the presence of pre-tax income forecasts significantly weakens the positive relation between tax expense surprise and future returns, consistent with analysts’ implicit forecasts of tax expense mitigating the tax expense anomaly.

Keywords: pre-tax income forecasts, disaggregated forecasts, tax expense anomaly, analysts’ forecasts

JEL Classification: G14, M41

Suggested Citation

Baik, Bok and Kim, Kyonghee and Morton, Richard M. and Roh, Yongoh, Analysts’ Pre-Tax Income Forecasts and the Tax Expense Anomaly (May 28, 2016). Review of Accounting Studies, Vol. 21, No. 2, 2016. Available at SSRN: https://ssrn.com/abstract=2786197

Bok Baik (Contact Author)

Seoul National University ( email )

Seoul
Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Kyonghee Kim

Michigan State University ( email )

N206 North Business Complex
632 Bogue Street
East Lansing, MI 48824
United States
517-432-2920 (Phone)

Richard M. Morton

Florida State University - Department of Accounting ( email )

Room No. 421
Tallahassee, FL 32306-8234
United States
850-644-7877 (Phone)

Yongoh Roh

New York University (NYU), Leonard N. Stern School of Business ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States

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