Do Analysts Mind the GAAP? Evidence From the Tax Cuts and Jobs Act of 2017

53 Pages Posted: 8 Jun 2020

See all articles by Novia (Xi) Chen

Novia (Xi) Chen

University of Houston - Department of Accountancy & Taxation

Allison Koester

Georgetown University

Date Written: May 7, 2020

Abstract

This study examines the quality of analysts’ GAAP-based earnings forecasts. Ideally, addressing this question requires events that have an ex ante estimable earnings impact, and affect GAAP earnings but not street earnings. The deferred tax adjustment as a result of a 2017 tax law change meets these criteria. Focusing on the fourth quarter of 2017 (2017Q4), we find that analysts’ GAAP earnings forecasts and revisions fail to incorporate the vast majority of the deferred tax adjustment. We explore two potential explanations for this finding – task-specific complexity and lack of GAAP earnings forecasting effort. We find evidence consistent with the latter. Our final analyses consider two implications of our findings. First, despite analysts underreacting to the deferred tax adjustment, investors promptly impound the adjustment into stock prices at the legislative enactment date, indicating that analysts’ GAAP earnings forecasts are not a good proxy for investor expectations of GAAP earnings during our sample period. Second, analysts who best incorporate the adjustment into their 2017Q4 GAAP earnings forecasts issue more accurate GAAP earnings forecasts for subsequent quarters, indicating that our inferences extend beyond a single quarter and account. Collectively, these findings have implications for research that relies on analysts’ GAAP earnings forecasts to be of reasonable quality.

Keywords: Analyst GAAP earnings forecasts, Tax Cuts and Jobs Act of 2017, tax rate change, accounting for income taxes

JEL Classification: G14, M40, M41

Suggested Citation

Chen, Novia (Xi) and Koester, Allison, Do Analysts Mind the GAAP? Evidence From the Tax Cuts and Jobs Act of 2017 (May 7, 2020). Available at SSRN: https://ssrn.com/abstract=3599616 or http://dx.doi.org/10.2139/ssrn.3599616

Novia (Xi) Chen (Contact Author)

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

Allison Koester

Georgetown University ( email )

McDonough School of Business
Washington, DC 20057
United States
202.687.6461 (Phone)

HOME PAGE: http://explore.georgetown.edu/people/apk29/

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