The Market Response to Beating After-tax Earnings Targets Revisited using Analysts' Pre-tax Earnings Forecasts and Concurrent Tax Note Disclosures

We investigate whether the premium for achieving after‐tax earnings targets is informed by the availability of pre‐tax and after‐tax earnings forecasts. We find evidence the premium is discounted for firms achieving only after‐tax earnings forecasts compared with firms achieving both forecast targets. This is likely due to the uncertainty about future profitability and earnings quality created by failing to attain pre‐tax earnings targets. For firms achieving only pre‐tax earnings forecasts, no premium is documented. Taken together, our results indicate that while pre‐tax earnings forecasts may not move the market, they have an informational role in providing a context for assessing the achievement of after‐tax earnings targets. We also consider the usefulness of the tax note disclosures of deferred tax assets from carry‐forward losses for assessing the premium for achieving after‐tax earnings targets. Reflecting the duality of this tax deferral, we find evidence that recognition of these tax assets conveys information about lower earnings quality when recognition is likely to be opportunistic (in the case of firms achieving only after‐tax forecasts), and provides a signal of future profitability (in the case of firms achieving only pre‐tax forecasts).