Do Auditor-Provided Tax Services Affect Analysts’ Forecasts?

• In Event: Accounting Firm Services

Abstract

We find no association between auditor-provided tax services (APTS) and the likelihood that analysts forecast pre-tax earnings, and implicitly, tax expense. However, we find that, as companies spend more on APTS, the accuracy of analysts’ forecasts of both pre-tax earnings and tax expense declines. We also document that companies with greater levels of APTS (and presumably more tax planning) have greater year-to-year volatility in both pre-tax earnings and effective tax rates (ETRs), and lower earnings and ETR persistence over time. Collectively, these results suggest that higher levels of APTS reduce earnings informativeness and make earnings and tax expense more difficult to forecast.

Authors

• Jere R Francis, University of Missouri-Columbia

• Stevanie S. Neuman, University of Missouri-Columbia

• Nathan Newton, University of Missouri-Columbia