Consistency in Book-Tax Differences and the Quality of Analysts’ Forecasts.

• In Event: Theory on Tax Compliance

Abstract

This study examines whether analysts are capable of processing the information from consistency in book-tax differences to enhance the quality of their earnings forecasts. We find that consistency in book-tax differences promotes analysts to provide less dispersed, more accurate and more informative forecasts. This suggests that analysts are able to exploit the information embedded in consistency in book-tax differences, elevating the quality of their earnings forecasts. We also show that the impact of consistency in book-tax differences on the analysts’ forecast quality increases with the level of information asymmetry around firms, supporting the information role of consistency in book-tax differences in improving the quality of analysts’ forecasts. Finally, we find a substantial increase in the informative impact of consistency in book-tax differences on the forecasts quality after Regulation FD, which suggests consistency in book-tax differences serves as a more important information source for analysts after such regulations. Overall, our results suggest that analysts are able to assimilate the information revealed by consistency in book-tax differences, resulting in greater improvement on the quality of analysts’ forecasts.

Authors

• Heeick Choi, University of Massachusetts-Lowell

• Rui Hu, University of Massachusetts-Lowell

• Khondkar E Karim, University of Massachusetts-Lowell