Oleh : Intan Oviantari

1. The Presistance, Forecasting, and Valuation Implications of The Tax Change Component of EarningsAndrew P. Schmidt Oleh : Intan Oviantari

2. Introduction • The tax change component of earnings is likely to have implications for earnings persistence for a number of reasons : 1. the small changes in ETR can lead to substantial changes in earnings 2. corporate manager placing greater emphasis on ETRs as in house tax departments are increasingly viewed as profit centers 3. Recent academic literature has identified ETR manipulation as an earnings management tools.

3. Contribution • Examines the persistence and pricing implications of book tax differences by directly examining how taxes contribute to earnings prediction, wich is consistent with the view that one task of accounting research is to discover what information in the financial statements projects future earnings (Penman 1992)

4. Previous Study

5. Corporate Income Tax Disclosure

6. Research Questions and Hypotheses

7. Research Design

8. Hypotheses 1

9. Hypotheses 2a dan 2b

10. Sample Selection Procedures and Sample Profile

11. Descriptive Statistics

12. Empirical Result • Tabel 1 Panel A : TRQ1 significantly higher than ETRt-1 and ETR. Indicates that management sets the estimates of the annual ETR too high in Q1, perhaps to create a reserve from which current earnings can be drawn, or because tax department are conservative in their initial estimates (Comprix et al. 2006)

13. Empirical Result • Tabel 1 Panel B : For the average firm in the sample, approximately 60% of INTCCt reverses by year end. Consistent with panel A and quantifies the effect of tax chnages on earnings. • Tabel 1 Panel C : present descriptive statistics for the risk and anomaly control variables.

14. Tabel 1

15. Tabel 2

16. The Persistence and Forecasting Implications of the Tax Change Component of Earnings

17. The Persistence and Forecasting Implications of the Tax Change Component of Earnings in Interim Periods

18. Valuation Implication of the Tax Change Component of earnings

19. Conclusions • There is a positive, significant association between the tax change component of earnings and future earnings. • The initial tax change component is more persistence, therefore, more useful in forecasting future earnings than the revised tax change component. • These results are consistent with H1. • Result from market tests indicate that investors underweight the forecasting implications of the tax change component and the mispricing appears to be driven by the transitory nature of the revised tax change component • Supplemental test confirm that the result obtained from the market test are likely a result of mispricing rather than alternative expalanation such as omitted risk factors.

20. Conclusions • The result suggest that investors can gain from breaking the tax change component of earnings into an initial and revised portion • If investor focus on the initial tax change component, they can better understand the persistence of earnings generated by ETR changes, and consequently, make better forecast of future earnings. • Such an understanding should also decrease the mispricing of ETR related earnings. • Investors may also benefit by focusing on the relative lack of persistence for the revised tax change component. When viewed in the context of concurrent research that find Q2, Q3, Q4 ETR revisions are used to meet or beat periodic specific benchmarks (e.g., analyst forecasts), the lower persistence of the revised tax change component is consistent with manager using the revised tax change component as an earnings management tool. • Increased attention to this issue may mitigate such behaviour by managers.