Analyst Forecast Accuracy when Deviating from Manager’s Voluntary Annual Effective Tax Rate Forecast

Analysts regularly issue ETR forecasts that meaningfully deviate from managers’ voluntary annual effective tax rate (ETR) forecasts. I examine whether these deviations impact analyst forecast accuracy. Comparing analyst forecasts that deviate to analyst forecasts that reiterate managers’ ETR forecasts in a firm-year fixed effects regression, I find that deviating analysts issue less accurate after-tax earnings, pretax earnings, and ETR forecasts. Further, the inaccurate deviating analyst ETR forecasts appear to be mainly caused by differences about tax forecasts rather than pretax earnings forecasts. Analysts are more likely to deviate from managers’ ETR forecasts when they have less firm forecasting experience, issue forecasts later in the period, follow more industries, and issue fewer forecasts for the firm. Overall, the results suggest that analysts lack tax information to improve on managers’ voluntary ETR forecasts.