Discussion of “Evidence of differing market responses to beating analysts’ targets through tax expense decreases”

Discussion of “Evidence of differing market responses to beating analysts’ targets through... Gleason and Mills (2008, Review of Accounting Studies) extend prior research investigating whether investors detect obvious earnings management. They improve on previous efforts to answer this question by examining firms with a clear motivation to manage earnings and by investigating a specific earnings management tool. They investigate firms that fall short of analysts’ expectations when income tax expense is based on the third quarter effective tax rate but meet expectations by reducing the fourth quarter tax expense below predicted tax expense. Their results suggest that investors are sophisticated enough to identify a transparent earnings management tool and that they discount the fact that firms meet expectations using such an obvious tactic. Specifically, the authors find evidence suggesting that the reward for meeting analysts’ expectations is 86% lower when managers use the tax expense as an earnings management tool to meet expectations. The puzzling feature of their results is that, although it is diminished, investors still reward firms for meeting expectations when they can only do so through an apparently obvious manipulation of tax expense. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Discussion of “Evidence of differing market responses to beating analysts’ targets through tax expense decreases”

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Publisher
Springer Journals
Copyright
Copyright © 2008 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-008-9074-3
Publisher site
See Article on Publisher Site

Abstract

Gleason and Mills (2008, Review of Accounting Studies) extend prior research investigating whether investors detect obvious earnings management. They improve on previous efforts to answer this question by examining firms with a clear motivation to manage earnings and by investigating a specific earnings management tool. They investigate firms that fall short of analysts’ expectations when income tax expense is based on the third quarter effective tax rate but meet expectations by reducing the fourth quarter tax expense below predicted tax expense. Their results suggest that investors are sophisticated enough to identify a transparent earnings management tool and that they discount the fact that firms meet expectations using such an obvious tactic. Specifically, the authors find evidence suggesting that the reward for meeting analysts’ expectations is 86% lower when managers use the tax expense as an earnings management tool to meet expectations. The puzzling feature of their results is that, although it is diminished, investors still reward firms for meeting expectations when they can only do so through an apparently obvious manipulation of tax expense.

Journal

Review of Accounting StudiesSpringer Journals

Published: Mar 11, 2008

References

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