Can Disclosure Characteristics Improve Analyst Forecast Accuracy?

Posted: 28 Sep 2017

Date Written: September 25, 2017

Abstract

This study provides new evidence about how tax footnote disclosure characteristics can alleviate errors in analyst forecasts of a firm’s effective tax rate (ETR). Despite the importance of income taxes to a firm’s bottom line, prior studies indicate that analysts and investors do not fully grasp the complexities of income taxes. Additionally, the FASB is interested in improving the effectiveness of financial statement footnotes and is evaluating the income tax footnote as part of the Disclosure Framework Project. I find that disclosures containing more quantitative information, less jargon, fewer complex words, and/or less legal terminology alleviate analysts’ ETR forecast errors related to complexity in income tax accounting. Collectively, my findings provide evidence regarding the areas of accounting for income taxes that make forecasting ETRs difficult and the disclosure characteristics that aid analysts’ understanding of tax information and thereby improve their ETR forecasts.

Keywords: disclosure effectiveness, income tax footnote, effective tax rate, analyst forecast accuracy

Suggested Citation

Hutchens, Michelle, Can Disclosure Characteristics Improve Analyst Forecast Accuracy? (September 25, 2017). Available at SSRN: https://ssrn.com/abstract=3042836 or http://dx.doi.org/10.2139/ssrn.3042836

Michelle Hutchens (Contact Author)

University of Illinois ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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