Do Firms Use Tax Reserves to Meet Analysts’ Forecasts? Evidence from the Pre†and Post†FIN 48 Periods

Sanjay Gupta, Rick C. Laux and Daniel P. Lynch

Contemporary Accounting Research, 2016, vol. 33, issue 3, 1044-1074

Abstract: We examine whether firms decrease tax reserves to meet analysts’ quarterly earnings forecasts in the period prior to FIN 48, and whether that behavior changed following FIN 48. We use analysts’ forecasts of pretax and after†tax income to impute premanaged earnings, or earnings before any tax manipulation. Pre†FIN 48, we observe that firms reduce their tax reserves (i.e., increase income) when premanaged earnings are below analysts’ forecasts. Specifically, 78 percent of firm†quarters that would have missed the analyst forecast if not for the tax reserve decrease, meet that target when the decrease is included. Furthermore, we find a significant positive association between the decrease in tax reserves and the deviation of premanaged earnings from analysts’ forecasts. In contrast, post†FIN 48, we find no evidence that firms use changes in tax reserves to manage earnings to meet analysts’ forecasts. Thus, our results suggest that FIN 48 has, at least initially, curtailed firms’ use of tax reserves to manage earnings.

Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
https://doi.org/10.1111/1911-3846.12180

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:coacre:v:33:y:2016:i:3:p:1044-1074

Access Statistics for this article

More articles in Contemporary Accounting Research from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().