Street vs. GAAP: Which Effective Tax Rate Is More Informative?

57 Pages Posted: 7 Apr 2020

See all articles by Erik Beardsley

Erik Beardsley

University of Notre Dame - Mendoza College of Business

Michael Mayberry

University of Florida - Fisher School of Accounting

Sean T. McGuire

Texas A&M University - Department of Accounting

Date Written: March 2020

Abstract

This study investigates how sophisticated market participants use tax-based information by examining whether analysts’ street effective tax rates (ETRs) are informative. When forecasting and assessing firm performance, analysts often exclude certain items they believe do not reflect current performance, resulting in “street” metrics such as street ETR. Using a hand-collected sample of analyst reports, we find that approximately 35 percent of street ETRs have at least one tax-specific exclusion, and over 90 percent have tax effects of pre-tax exclusions. Consistent with analysts’ understanding the implications of tax and non-tax exclusions, our results suggest that street ETRs are more informative than GAAP ETRs. We investigate variation in analysts’ ETR exclusions and find that ETR exclusions are of higher quality when the magnitude of the potential excluded item is greater and when managers disclose pro forma earnings. These results provide a nuanced view of the extent that analysts incorporate tax-based information into their assessment of firm performance. Collectively, our findings suggest that analysts understand taxes, but selectively exert effort to understand and incorporate tax-based information into their assessment of firm performance.

Keywords: Non-GAAP reporting, street earnings, accounting for income taxes, effective tax rates, analysts

Suggested Citation

Beardsley, Erik and Mayberry, Michael and McGuire, Sean T., Street vs. GAAP: Which Effective Tax Rate Is More Informative? (March 2020). Available at SSRN: https://ssrn.com/abstract=3555795 or http://dx.doi.org/10.2139/ssrn.3555795

Erik Beardsley (Contact Author)

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

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

Michael Mayberry

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

Sean T. McGuire

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
76
Abstract Views
250
rank
336,140
PlumX Metrics