Forecasting Tax Expense: New Evidence from Analysts

Abstract

Using recently available pre-tax earnings forecast data from 2003 to 2012, we infer analysts’ income tax expense and effective tax rate (ETR) forecasts and provide the first large-sample evidence on their dispersion and accuracy. Even though managers provide annual ETR estimates each interim quarter, management’s estimates are not equal in information content and analysts do not merely mimic these estimates, consistent with analysts providing incremental information. Analysts’ forecasts are more disperse and less accurate when management’s interim ETR estimate include discrete items, consistent with more uncertainty and greater difficulty in understanding the tax environment when accounting standards require exceptions to the integral method. Taken together, our results suggest management interim ETR estimates are critical to the market’s understanding of tax expense.