Bias in Quarterly Estimates of Annual Effective Tax Rates and Earnings Management

39 Pages Posted: 10 Sep 2004 Last revised: 24 Aug 2011

See all articles by Joseph Comprix

Joseph Comprix

Syracuse University

Lillian F. Mills

University of Texas at Austin - McCombs School of Business

Andrew Schmidt

North Carolina State University

Multiple version iconThere are 2 versions of this paper

Date Written: May 12, 2011

Abstract

We investigate whether quarterly annual effective tax rate (ETR) estimates are systematically biased in comparison to year-end actual ETRs. We find that estimated annual ETRs in the first, second, and third quarters are systematically higher than year-end ETRs. We then investigate whether firms’ overstatement of quarterly ETRs creates slack that is used for earnings management. We find that quarterly ETR increases are more likely to be reversed when firms would have missed their analysts’ earnings forecast absent the reversal. Finally, we show that in the years subsequent to the passage of the Sarbanes-Oxley Act (SOX) the changes in the ETR are more highly associated with earnings management. These results documenting patterns of annual ETR estimates and revisions contribute to research about how earnings management is accomplished.

Keywords: Earnings Management, Effective Tax Rates, Tax Expense, Quarterly Earnings

JEL Classification: H25, M41, M43, J33

Suggested Citation

Comprix, Joseph and Mills, Lillian F. and Schmidt, Andrew P., Bias in Quarterly Estimates of Annual Effective Tax Rates and Earnings Management (May 12, 2011). AAA 2005 FARS Meeting Paper, Available at SSRN: https://ssrn.com/abstract=589425 or http://dx.doi.org/10.2139/ssrn.589425

Joseph Comprix

Syracuse University ( email )

Whitman School of Management
721 University Avenue
Syracuse, NY 13244-2450
United States
315-443-3674 (Phone)
315-442-1461 (Fax)

Lillian F. Mills

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Andrew P. Schmidt (Contact Author)

North Carolina State University ( email )

Raleigh, NC 27695-8113
United States

HOME PAGE: http://https://poole.ncsu.edu/people/apschmid/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
831
Abstract Views
4,276
rank
31,337
PlumX Metrics