The Association between SEC Comment Letter Review and Analyst ETR Forecast Accuracy

Abstract

The Securities and Exchange Commission (SEC) issues comment letters suggesting revisions to firms’ tax disclosures with the goal of improving the informativeness of these disclosures. I examine if SEC-prompted revisions to firms’ tax disclosures are associated with changes in the informativeness of the disclosures. I use the accuracy of analyst effective tax rate (ETR) forecasts as a proxy for tax disclosure informativeness. I find that SEC-prompted revisions are associated with a decrease in analyst ETR forecast accuracy, indicating a decrease in the informativeness of tax disclosures. However, I find that increased tabular presentation attenuates the decrease in analyst ETR forecast accuracy. Prior literature examines benefits of the SEC comment letter process on the information environment. I extend prior literature on the outcome of SEC comment letter review by identifying reduced tax disclosure informativeness as one potential cost.