Street versus GAAP: Which Effective Tax Rate Is More Informative?

• Published in: Contemporary accounting research 2021-06, Vol.38 (2), p.1310-1340
• Main Authors: Beardsley, Erik L., Mayberry, Michael A., McGuire, Sean T.
• Format: Article
• Language: English
• Subjects: accounting for income taxes; analystes; Analysts; Earnings; effective tax rates; Exclusion; Financial information; GAAP; Imposition; impôts; information non conforme aux PCGR; non‐GAAP reporting; Organizational performance; Predictions; résultats présentés par les analystes; street earnings; taux d'imposition effectifs; Tax rates; Taxation; Taxes; traitement comptable des impôts sur le résultat; Usefulness
• ISSN: 0823-9150; 1911-3846
• DOI: 10.1111/1911-3846.12651

ABSTRACT This study investigates how sophisticated market participants use tax‐based information by examining whether analysts' street effective tax rates (ETRs) are informative. When assessing firm performance, analysts exclude items they believe do not reflect current performance, resulting in “street” metrics such as street ETR. However, evidence on the properties of the components of street earnings is limited. Examining the informativeness of street ETRs is important because taxes are a significant component of earnings, and the extent to which analysts understand taxes and incorporate them into their analyses is not clear. Using a hand‐collected sample of analyst reports, we find that while approximately 35% of street ETRs have at least one tax‐specific exclusion, over 90% reflect the tax effects of pre‐tax exclusions. Further, both tax‐specific exclusions and the tax effects of pre‐tax exclusions significantly contribute to differences between GAAP and street ETRs. Consistent with analysts' understanding of the implications of tax and nontax exclusions, our results suggest that street tax metrics exhibit greater predictive ability about future tax outcomes and provide more information to investors than GAAP tax metrics. We also find that ETR exclusions are of higher quality when the magnitude of the potentially excluded item is greater and when managers disclose pro forma earnings. Collectively, our findings suggest that analysts understand taxes, but selectively exert effort to incorporate tax‐based information into their assessment of firm performance. Our study should be informative to regulators and users of financial information because it provides evidence regarding the usefulness of street earnings metrics. RÉSUMÉ Valeur informative comparée des taux d'imposition effectifs non conformes aux PCGR présentés par les analystes et des taux d'imposition effectifs conformes aux PCGR Les auteurs, qui s'intéressent à l'usage que font de l'information tenant compte de l'impôt les intervenants avertis du marché, s'interrogent sur la valeur informative des taux d'imposition effectifs non conformes aux PCGR présentés par les analystes (TIE des analystes). Lorsqu'ils évaluent la performance d'une société, les analystes excluent les éléments qui, selon eux, ne reflètent pas la performance de cette dernière dans l'immédiat et produisent ainsi des indicateurs de performance « non conformes aux PCGR », dont le TIE. Les données probantes quant aux propriétés de