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The Market Response to Beating After-tax Earnings Targets Revisited using Analysts' Pre-tax Earnings Forecasts and Concurrent Tax Note Disclosures

Journal of business finance & accounting, 2016-01, Vol.43 (1-2), p.31-65 [Peer Reviewed Journal]

2016 John Wiley & Sons Ltd ;Copyright Blackwell Publishing Ltd. Jan-Feb 2016 ;ISSN: 0306-686X ;EISSN: 1468-5957 ;DOI: 10.1111/jbfa.12181

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  • Title:
    The Market Response to Beating After-tax Earnings Targets Revisited using Analysts' Pre-tax Earnings Forecasts and Concurrent Tax Note Disclosures
  • Author: Herbohn, Kathleen ; Tutticci, Irene ; Tan, Zhi
  • Subjects: analysts earnings forecasts ; analysts pre-tax earnings forecasts ; carry-forward losses ; Carryforward ; Deferred income taxes ; deferred tax assets ; Disclosure ; Earnings forecasting ; Earnings management ; earnings quality ; earnings surprise ; earnings targets ; market reaction ; Profitability ; Profits ; Studies ; tax notes
  • Is Part Of: Journal of business finance & accounting, 2016-01, Vol.43 (1-2), p.31-65
  • Description: We investigate whether the premium for achieving after‐tax earnings targets is informed by the availability of pre‐tax and after‐tax earnings forecasts. We find evidence the premium is discounted for firms achieving only after‐tax earnings forecasts compared with firms achieving both forecast targets. This is likely due to the uncertainty about future profitability and earnings quality created by failing to attain pre‐tax earnings targets. For firms achieving only pre‐tax earnings forecasts, no premium is documented. Taken together, our results indicate that while pre‐tax earnings forecasts may not move the market, they have an informational role in providing a context for assessing the achievement of after‐tax earnings targets. We also consider the usefulness of the tax note disclosures of deferred tax assets from carry‐forward losses for assessing the premium for achieving after‐tax earnings targets. Reflecting the duality of this tax deferral, we find evidence that recognition of these tax assets conveys information about lower earnings quality when recognition is likely to be opportunistic (in the case of firms achieving only after‐tax forecasts), and provides a signal of future profitability (in the case of firms achieving only pre‐tax forecasts).
  • Publisher: Oxford: Blackwell Publishing Ltd
  • Language: English
  • Identifier: ISSN: 0306-686X
    EISSN: 1468-5957
    DOI: 10.1111/jbfa.12181
  • Source: Alma/SFX Local Collection
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