The Role of Additional Disaggregated Forecasts: Evidence Using Pre-Tax Forecasts

I examine whether analysts’ implicit tax expense forecasts help investors evaluate firm performance, identify tax-related earnings management, and decrease tax avoidance. Using I/B/E/S data from 2002-2014, I find investors utilize both analysts’ pre- and after-tax earnings forecasts in evaluating firm performance, indicating analysts’ tax expense forecasts are value-relevant. Furthermore, investors more significantly discount earnings managed through the tax account when pre-tax earnings forecasts are available. Lastly, tax avoidance is inversely associated with changes in analysts’ pre-tax forecast coverage for the firm. This study provides evidence that analysts’ tax-related forecasts are useful in multiple settings. This evidence helps academics and practitioners better understand the role of disaggregated income statement forecasts.