Interim Income Tax Data and Earnings Prediction
28 Pages Posted: 18 Apr 2002
Date Written: March 2002
Abstract
This study examines the usefulness of interim income tax disclosures in predicting future earnings and analysts' forecast errors. The integral view of interim financial reporting requires managers to make their best estimate of the effective income tax rate expected to be in effect for the year. Thus, the effective tax rate disclosed in the first quarter's Form 10-Q potentially provides some private information regarding management's expectations for forthcoming earnings. Our analyses show that these interim tax rate disclosures are useful in predicting future earnings and, in addition, are positively related to analysts' forecast errors. The results suggest analysts underutilize effective tax rate information in interim disclosures that could be used to improve the accuracy of their earnings forecasts.
Keywords: Income taxes, Earnings forecasts
JEL Classification: M41, G29
Suggested Citation: Suggested Citation
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