The Role of Additional Non-EPS Forecasts: Evidence Using Pre-Tax Forecasts
AdvisorDhaliwal, Dan S.
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PublisherThe University of Arizona.
RightsCopyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.
EmbargoRelease after 08-Apr-2014
AbstractIn this study, I examine whether and how analysts' pre-tax earnings forecasts are informative to investors. Specifically, I first examine the determinants of pre-tax forecast coverage and whether pre-tax forecasts are incrementally informative to investors in evaluating firm performance. Next, I examine whether pre-tax forecasts decrease the transparency of tax-related earnings management. Lastly, I examine how pre-tax earnings forecasts influence management's incentives to avoid taxes. Using I/B/E/S data from 2002-2011, I find pre-tax forecast coverage is associated with firm-level tax characteristics. In addition, I find investors utilize pre-tax earnings forecasts in evaluating firm performance, after controlling for after-tax earnings forecasts. In addition, the results of this study indicate investors more significantly discount earnings which have been managed through the tax account when pre-tax earnings forecasts are available, consistent with increased transparency resulting from detailed forecasting. Lastly, I find some evidence that increases in pre-tax forecast coverage are associated with a decrease in tax avoidance. This result is consistent with a change in management's incentives resulting from the existence of additional performance benchmarks. Collectively, this study provides evidence that pre-tax earnings forecasts are informative in multiple settings. These findings have important implications for academics and practitioners in understanding the role of additional non-EPS income statement forecasts.
Degree ProgramGraduate College