Review of Accounting Studies

, Volume 21, Issue 2, pp 559–595 | Cite as

Analysts’ pre-tax income forecasts and the tax expense anomaly

  • Bok Baik
  • Kyonghee Kim
  • Richard Morton
  • Yongoh Roh


This paper examines whether analysts’ pre-tax income forecasts mitigate the tax expense anomaly documented by Thomas and Zhang (J Account Res 49:791–821, 2011). They find that seasonal changes in quarterly income tax expense are positively related to future returns after controlling for the earnings surprise and conclude that investors underreact to value-relevant information in tax expense. When analysts issue both earnings and pre-tax income forecasts, they implicitly provide a forecast of income tax expense. We posit that this implicit forecast helps investors recognize the persistence of current tax expense surprise for future earnings. Accordingly, we expect that mispricing of tax expense will be less severe for firms with earnings and pre-tax income forecasts. As expected, we find that the presence of pre-tax income forecasts significantly weakens the positive relation between tax expense surprise and future returns, consistent with analysts’ implicit forecasts of tax expense mitigating the tax expense anomaly.


Pre-tax income forecasts Disaggregated forecasts Tax expense anomaly Analysts’ forecasts 

JEL Classification

G14 M41 



We thank Katherine Sonu, Frank Zhang (discussant), and participants at the 2014 Korean Accounting Association annual meeting and the 2015 American Accounting Association annual meeting for their helpful comments and suggestions. Bok Baik acknowledges financial support from the Institute of Management Research, Seoul National University.


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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  • Bok Baik
    • 1
  • Kyonghee Kim
    • 2
  • Richard Morton
    • 3
  • Yongoh Roh
    • 1
  1. 1.Business SchoolSeoul National UniversitySeoulKorea
  2. 2.Trulaske College of BusinessUniversity of Missouri at ColumbiaColumbiaUSA
  3. 3.College of BusinessFlorida State UniversityTallahasseeUSA

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