The market response to beating after-tax earnings targets revisited using analysts' pre-tax earnings forecasts and concurrent tax note disclosures

Kathleen Herbohn, Irene Tutticci and Tan, Zhi (2016) 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 and Accounting, 43 1-2: 31-65. doi:10.1111/jbfa.12181


Author Kathleen Herbohn
Irene Tutticci
Tan, Zhi
Title The market response to beating after-tax earnings targets revisited using analysts' pre-tax earnings forecasts and concurrent tax note disclosures
Journal name Journal of Business Finance and Accounting   Check publisher's open access policy
ISSN 1468-5957
0306-686X
Publication date 2016-01-22
Sub-type Article (original research)
DOI 10.1111/jbfa.12181
Open Access Status Not Open Access
Volume 43
Issue 1-2
Start page 31
End page 65
Total pages 57
Place of publication Chichester, West Sussex, United Kingdom
Publisher Wiley-Blackwell
Language eng
Abstract 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).
Keyword Tax notes
Carry forward losses
Deferred tax asset
Market reaction
Earnings quality
Earnings surprise
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: HERDC Pre-Audit
UQ Business School Publications
 
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Created: Fri, 05 Feb 2016, 23:35:48 EST by Kathleen Herbohn on behalf of UQ Business School