Analysts’ pre-tax income forecasts and the tax expense anomaly

Bok Baik (), Kyonghee Kim (), Richard Morton () and Yongoh Roh ()
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Bok Baik: Seoul National University
Kyonghee Kim: University of Missouri at Columbia
Richard Morton: Florida State University
Yongoh Roh: Seoul National University

Review of Accounting Studies, 2016, vol. 21, issue 2, No 6, 559-595

Abstract: Abstract This paper examines whether analysts’ pre-tax income forecasts mitigate the tax expense anomaly documented by Thomas and Zhang (J Account Res 49:791–821, 2011). They find that seasonal changes in quarterly income tax expense are positively related to future returns after controlling for the earnings surprise and conclude that investors underreact to value-relevant information in tax expense. When analysts issue both earnings and pre-tax income forecasts, they implicitly provide a forecast of income tax expense. We posit that this implicit forecast helps investors recognize the persistence of current tax expense surprise for future earnings. Accordingly, we expect that mispricing of tax expense will be less severe for firms with earnings and pre-tax income forecasts. As expected, we find that the presence of pre-tax income forecasts significantly weakens the positive relation between tax expense surprise and future returns, consistent with analysts’ implicit forecasts of tax expense mitigating the tax expense anomaly.

Keywords: Pre-tax income forecasts; Disaggregated forecasts; Tax expense anomaly; Analysts’ forecasts (search for similar items in EconPapers)
JEL-codes: G14 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11142-016-9349-z

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