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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2023 Grand Challenge: Workforce Disrupted
Market-Based Solutions to Vital Economic Issues
Feb 15, 2018

The Effect Of Temporary Tax Laws On Understanding And Predicting Corporate Earnings


This paper investigates the extent to which the expiration of a temporary tax law makes corporate earnings harder to predict and understand. Examining evidence from eight separate expirations of the R&D tax credit, I find that analysts’ forecast errors and abnormal volume increase surrounding quarterly earnings announcements for firms affected by the R&D tax credit. These increases suggest difficulties in forecasting and understanding earnings for R&D credit firms when the R&D tax credit is expired. In additional analysis, I find some evidence that the reason for the difficulty in prediction is a lack of information. The results of this study call attention to previously unexplored consequences of temporary tax laws, namely their ability to affect corporate earnings.

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