A Tale of Two Forecasts: An Analysis of Mandatory and Voluntary Effective Tax Rate Forecasts

64 Pages Posted: 8 Nov 2018 Last revised: 2 Dec 2020

See all articles by Novia (Xi) Chen

Novia (Xi) Chen

University of Houston - Department of Accountancy & Taxation

Sabrina Chi

CSU Fullerton

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Date Written: November 19, 2020

Abstract

Disclosure theory predicts that the likelihood of voluntary disclosure increases with the level of noise in mandatory disclosure. We test this prediction by exploiting a unique setting where firms provide two forecasts of the same underlying metric – annual effective tax rates (ETRs). We find that managers are more likely to issue voluntary ETR forecasts when mandatory ETR forecasts contain more noise due to tax complexity. This finding suggests that managers resort to voluntary disclosure when mandatory disclosure constrains their ability to convey private information. Using analysts’ ETR forecast revisions to assess the informativeness of voluntary and mandatory ETR forecasts, we find that both forecasts are incrementally informative. However, analysts place a greater weight on voluntary ETR forecasts compared to mandatory ETR forecasts, especially when voluntary ETR forecasts are non-GAAP based and when discrete items are present. Overall, our study provides context specific evidence on the relation between voluntary and mandatory forward-looking disclosures, and on sophisticated financial statement users’ responses to both forms of disclosures.

Keywords: voluntary disclosure, mandatory disclosure, ETR forecast

JEL Classification: M40, M41

Suggested Citation

Chen, Novia (Xi) and Chi, Sabrina and Shevlin, Terry J. and Shevlin, Terry J., A Tale of Two Forecasts: An Analysis of Mandatory and Voluntary Effective Tax Rate Forecasts (November 19, 2020). Available at SSRN: https://ssrn.com/abstract=3271837 or http://dx.doi.org/10.2139/ssrn.3271837

Novia (Xi) Chen

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

Sabrina Chi

CSU Fullerton ( email )

Fullerton, CA
United States

Terry J. Shevlin (Contact Author)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

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