We document several factors that help explain cross-sectional variations in the post-revision price drift associated with analyst forecast revisions. First, the market does not make a sufficient distinction between revisions that provide new information (“high-innovation” revisions) and revisions that merely move toward the consensus (“low-innovation” revisions). Second, the price adjustment process is faster and more complete for “celebrity” analysts (Institutional Investor All-Stars) than for more obscure yet highly accurate analysts (Wall Street Journal Earnings-Estimators). Third, controlling for other factors, the price adjustment process is faster and more complete for firms with greater analyst coverage. Finally, a substantial portion of the delayed price adjustment occurs around subsequent earnings-announcement and forecast-revision dates. Collectively, these findings show that more subtle aspects of an earnings revision signal can hinder the efficacy of market price discovery, particularly in firms with relatively low analyst coverage, and that subsequent earnings-related news events serve as catalysts in the price discovery process.

We assert that the tax expense is a powerful context in which to study earnings management, because it is one of the last accounts closed prior to earnings announcements. Although many pre-tax accruals must be posted in the year-end general ledger, managers estimate and negotiate tax expense with their auditors immediately prior to earnings announcements. We hypothesize that changes from third-to fourth-quarter effective tax rates (ETRs) are negatively related to whether and how much a firm's earnings absent tax expense management miss analysts' consensus forecast, a proxy for target earnings. We measure earnings absent tax expense management as actual pre-tax earnings adjusted for the annual ETR reported at the third quarter.We provide robust evidence that firms lower their projected ETRs when they miss the consensus forecast, which is consistent with firms decreasing their tax expense if non-tax sources of earnings management are insufficient to achieve targets. We also find that firms that exceed earnings targets increase their ETR, but this effect is less significant. By studying the tax expense in total, rather than narrow components of deferred tax expense, our results provide general evidence that reported taxes are used to manage earnings. L'ultime instrument de gestion des résultats : l'utilisation de la charge d'impôts pour concrétiser les prévisions des analystes Keywords CondenséUtilise-t-on régulièrement la charge d'impôts de l'exercice pour parvenir aux résultats ciblés ? La chronologie de la préparation des états financiers et de la vérification indépendante porte à croire qu'il serait logique d'axer sur la charge d'impôts l'étude de la gestion des résultats dans le but d'atteindre des résultats ciblés. Compte tenu de la complexité de l'estimation de la charge d'impôts et du moment de la constatation des impôts préalablement à l'annonce des résultats, les auteurs croient que la charge d'impôts est riche et trop peu explorée dans l'étude de la gestion des résultats. Lorsque les gestionnaires sont encouragés à atteindre des résultats cibles déterminés, le compte de la charge d'impôts offre une possibilité ultime de gestion des résultats. La charge d'impôts est l'un des derniers comptes à être fermé avant l'annonce des résultats, étant donné que les autres changements liés aux bénéfices ont une incidence sur les comptes d'impôt.La charge d'impôts de l'exercice respecte également les conditions que Schipper (1989) juge nécessaires à la gestion des résultats. Selon elle, en effet, pour que les gestionnaires puissent « gérer les résultats », l'asymétrie de l'information entre gestionnaires et actionnaires doit persister. La charge d'impôts de l'exercice est difficile à estimer dans les grandes sociétés, en raison de la complexité de l'information que doivent recueillir les gestionnaires entre la fin de l'exercice et la date de l'annonce des résultats. Les éléments de la charge d'impôts totale qui présentent cette complexité et offrent la possibilité de planifier le taux d'imposition englobent la...

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We investigate factors that explain firms' decisions to disclose and record contingent tax liabilities. Our findings are based on confidential Internal Revenue Service audit data and financial statement footnotes for 100 large industrial firms from 1987 to 1995. Descriptive statistics indicate that these firms often fail to disclose IRS claims for tax deficiencies that exceed a 5-percent-of-income rule of thumb. We find that the probability of disclosure increases in the relative amount of the claim or the expected loss, although the largest claims drive this result. Our evidence is consistent with firms using a stable measure of size, such as assets or normal income, to gauge materiality, rather than relying only on current period reported income. We also find that the amount accrued for the contingent liability increases in the amount of the expected loss. However, our inferences may not generalize beyond a population of large, frequently audited firms.

Education fund for financial support. The Internal Revenue Service (IRS) provided confidential tax information to one of the authors pursuant to provisions of the Internal Revenue Code that allow disclosure of information to a contractor to the extent necessary to perform a research contract for the IRS. None of the confidential tax information received from the IRS is disclosed in this treatise. Statistical aggregates were used so that a specific taxpayer cannot be identified from information supplied by the IRS. 1.When we refer to independence throughout this paper, we mean independence in fact. We acknowledge that ATS also create a problem of independence in appearance. Several studies including Dopuch, King, and Schwartz 2003 and Khurana and Raman 2006 find investors perceive the disclosure of nonaudit services negatively. Dopuch et al. call for more evidence about the degree of correspondence between independence in fact and in appearance. 2.Joe and Vandervelde (2007) find a loss of independence could stem from auditors' subconscious actions even with no intent to conceal information.

We predict and find that accounting restatements that adversely affect shareholder wealth at the restating firm also induce share price declines among non-restating firms in the same industry. These share price declines are unrelated to changes in analysts' earnings forecasts, but instead seem to reflect investors' accounting quality concerns. Peer firms with high industry-adjusted accruals experience a more pronounced share price decline than do low-accrual firms. This accounting contagion effect is concentrated among revenue restatements by relatively large firms in the industry. We also find that investors impose a larger penalty on the stock prices of peer firms with high earnings and high accruals when peer and restating firms use the same external auditor. Our results are consistent with the notion that some accounting restatements cause investors to reassess the financial statement information previously released by non-restating firms.

We provide new evidence about how analysts incorporate and improve on management ETR forecasts. Quarterly ETR reporting under the integral method provides mandatory point-estimate forecasts by management, but firms must record certain “discrete” tax items fully in the quarter in which they occur, polluting these forecasts. We investigate management ETR accuracy, analysts' decisions to mimic management's estimate, analysts' accuracy relative to each other or to management, and dispersion. Our comprehensive analysis reveals that analysts deviate from management more and are more accurate relative to management as complexity increases, with real effects on EPS accuracy and dispersion. In contrast to prior research that analysts ignore or are confused by taxes, we provide evidence that analysts pay attention to taxes and improve on management estimates. Based on our evidence that management's quarterly ETRs have less predictive value in the presence of discrete items, we suggest standard-setters reexamine the discrete item exception to require more disclosure.

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