Can Disclosure Characteristics Improve Analyst Forecast Accuracy?

Research output: Working paper

Abstract

This study provides new evidence about how tax footnote disclosure characteristics can alleviate errors in analyst forecasts of a firm’s effective tax rate (ETR). Despite the importance of income taxes to a firm’s bottom line, prior studies indicate that analysts and investors do not fully grasp the complexities of income taxes. Additionally, the FASB is interested in improving the effectiveness of financial statement footnotes and is evaluating the income tax footnote as part of the Disclosure Framework Project. I find that disclosures containing more quantitative information, less jargon, fewer complex words, and/or less legal terminology alleviate analysts’ ETR forecast errors related to complexity in income tax accounting. Collectively, my findings provide evidence regarding the areas of accounting for income taxes that make forecasting ETRs difficult and the disclosure characteristics that aid analysts’ understanding of tax information and thereby improve their ETR forecasts.
Original languageEnglish (US)
DOIs
StatePublished - Sep 28 2017

Fingerprint

Analysts' forecasts
Disclosure
Forecast accuracy
Income tax
Analysts
Effective tax rates
Tax
Investors
Financial statements
Forecast error

Keywords

  • disclosure effectiveness
  • income tax footnote
  • effective tax rate
  • analyst forecast accuracy

Cite this

@techreport{598964d076c54f62823e5ac37eb0eb6c,
title = "Can Disclosure Characteristics Improve Analyst Forecast Accuracy?",
abstract = "This study provides new evidence about how tax footnote disclosure characteristics can alleviate errors in analyst forecasts of a firm’s effective tax rate (ETR). Despite the importance of income taxes to a firm’s bottom line, prior studies indicate that analysts and investors do not fully grasp the complexities of income taxes. Additionally, the FASB is interested in improving the effectiveness of financial statement footnotes and is evaluating the income tax footnote as part of the Disclosure Framework Project. I find that disclosures containing more quantitative information, less jargon, fewer complex words, and/or less legal terminology alleviate analysts’ ETR forecast errors related to complexity in income tax accounting. Collectively, my findings provide evidence regarding the areas of accounting for income taxes that make forecasting ETRs difficult and the disclosure characteristics that aid analysts’ understanding of tax information and thereby improve their ETR forecasts.",
keywords = "disclosure effectiveness, income tax footnote, effective tax rate, analyst forecast accuracy",
author = "Michelle Hutchens",
year = "2017",
month = "9",
day = "28",
doi = "10.2139/ssrn.3042836",
language = "English (US)",
type = "WorkingPaper",

}

TY - UNPB

T1 - Can Disclosure Characteristics Improve Analyst Forecast Accuracy?

AU - Hutchens, Michelle

PY - 2017/9/28

Y1 - 2017/9/28

N2 - This study provides new evidence about how tax footnote disclosure characteristics can alleviate errors in analyst forecasts of a firm’s effective tax rate (ETR). Despite the importance of income taxes to a firm’s bottom line, prior studies indicate that analysts and investors do not fully grasp the complexities of income taxes. Additionally, the FASB is interested in improving the effectiveness of financial statement footnotes and is evaluating the income tax footnote as part of the Disclosure Framework Project. I find that disclosures containing more quantitative information, less jargon, fewer complex words, and/or less legal terminology alleviate analysts’ ETR forecast errors related to complexity in income tax accounting. Collectively, my findings provide evidence regarding the areas of accounting for income taxes that make forecasting ETRs difficult and the disclosure characteristics that aid analysts’ understanding of tax information and thereby improve their ETR forecasts.

AB - This study provides new evidence about how tax footnote disclosure characteristics can alleviate errors in analyst forecasts of a firm’s effective tax rate (ETR). Despite the importance of income taxes to a firm’s bottom line, prior studies indicate that analysts and investors do not fully grasp the complexities of income taxes. Additionally, the FASB is interested in improving the effectiveness of financial statement footnotes and is evaluating the income tax footnote as part of the Disclosure Framework Project. I find that disclosures containing more quantitative information, less jargon, fewer complex words, and/or less legal terminology alleviate analysts’ ETR forecast errors related to complexity in income tax accounting. Collectively, my findings provide evidence regarding the areas of accounting for income taxes that make forecasting ETRs difficult and the disclosure characteristics that aid analysts’ understanding of tax information and thereby improve their ETR forecasts.

KW - disclosure effectiveness

KW - income tax footnote

KW - effective tax rate

KW - analyst forecast accuracy

U2 - 10.2139/ssrn.3042836

DO - 10.2139/ssrn.3042836

M3 - Working paper

BT - Can Disclosure Characteristics Improve Analyst Forecast Accuracy?

ER -