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Research
Feb 15, 2018

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

Abstract

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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