Does Tax Planning Affect Analysts' Earnings Forecasts?

54 Pages Posted: 22 Oct 2018

See all articles by Jere R. Francis

Jere R. Francis

University of Missouri at Columbia

Stevanie S. Neuman

University of Missouri at Columbia - School of Accountancy

Nathan J. Newton

Florida State University - Department of Accounting

Date Written: October 3, 2018

Abstract

We investigate whether firms’ tax planning affects the accuracy of analysts’ forecasts. Tax planning can exacerbate the complexity of firms’ operations through strategic choices to exploit tax laws. Because of its effect on firms’ operations, tax planning can influence analysts’ efforts to understand and forecast earnings. Specifically, if the additional complexity arising from tax planning makes firm attributes less representative of expected earnings, analysts may issue less accurate forecasts. Using auditor-provided tax services (APTS) as a measure of tax planning, we find that, as firms spend more on tax planning, the accuracy of analysts’ forecasts of both earnings and tax expense declines. We also document that firms with higher levels of APTS have greater year-to-year volatility in, and lower persistence of, effective tax rates and earnings. Our results suggest that increased firm complexity, due to greater tax planning, makes earnings and tax expense more difficult to forecast and that analysts do not properly adjust for these effects. Thus, when deciding whether to engage in tax planning, firms appear to make tradeoffs between potential tax savings and negative effects on earnings properties and analysts’ forecasts.

Keywords: auditor-provided tax services, analyst forecasts, tax planning

JEL Classification: M40, M41, M42, M49

Suggested Citation

Francis, Jere R. and Neuman, Stevanie S. and Newton, Nathan J., Does Tax Planning Affect Analysts' Earnings Forecasts? (October 3, 2018). Available at SSRN: https://ssrn.com/abstract=3260027 or http://dx.doi.org/10.2139/ssrn.3260027

Jere R. Francis

University of Missouri at Columbia ( email )

303 Cornell Hall
School of Accountancy
Columbia, MO 65211
United States
573-882-5156 (Phone)
573-882-2437 (Fax)

Stevanie S. Neuman (Contact Author)

University of Missouri at Columbia - School of Accountancy ( email )

College of Business
Columbia, MO 65211
United States

Nathan J. Newton

Florida State University - Department of Accounting ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States

HOME PAGE: http://https://business.fsu.edu/faculty-and-staff/academic-departments/academic-departments-home/Det

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