This paper analyzes the manner in which financial analysts' forecasts of annual earnings are formed. A sample of over 6,000 earnings forecasts made over a period of 11 years is examined. The results from the time-series tests show that analysts' forecasts of annual earnings are rational in the sense that they fully utilize the information contained in the past history of earnings and their own forecasts. The findings also suggest that the adaptive expectations model adequately describes the process of the formation of earnings forecasts. The adaptation coefficient, however, is not constant across companies and over time. The results imply that the use of mean forecasts and cross-sectional (rather than time-series) tests in previous studies has reduced the tests' power and efficiency, but still led to valid conclusions.

[This paper analyzes the manner in which financial analysts forecasts of annual earnings are formed. A sample of over 6,000 earnings forecasts made over a period of 11 years is examined. The results from the time-series tests show that analysts' forecasts of annual earnings are rational in the sense that they fully utilize the information contained in the past history of earnings and their own forecasts. The findings also suggest that the adaptive expectations model adequately describes the process of the formation of earnings forecasts. The adaptation coefficient, however, is not constant across companies and over time. The results imply that the use of mean forecasts and cross-sectional (rather than time-series) tests in previous studies has reduced the tests' power and efficiency, but still led to valid conclusions.]

This paper documents changes in the patterns of earnings, cash flows and accruals over the last four decades. In the absence of a generally accepted definition of conservatism, a number of measures of reporting conservatism are identified and examined. These measures rely on the accumulation of nonoperating accruals, the timeliness of earnings with respect to bad and good news, characteristics of the earnings distribution and the market-to-book ratio. The patterns are consistent with an increase in conservative financial reporting over time. The findings have implications for accounting standard setting, regulation of financial information and financial statement analysis.

The specification of the market expectation of accounting numbers is a common feature of many empirical studies in accounting and finance. Givoly and Lakonishok (1979) found that financial analysts' forecasts have information content. This study evaluates the quality of analysts' forecasts as surrogates for the market expectation of earnings and compares it with that of prediction models commonly used in research. Results indicate that prediction errors of analysts are more closely associated with security price movements, suggesting that analysts' forecasts provide a better surrogate for market expectations than forecasts generated by time-series models. The study also identifies factors that might contribute to the performance of the financial analysts'forecasts. The broadness of the information set employed by analysts and, to a lesser extent, their reliance on information released after the end of the fiscal year appear to be important contributors to their performance.

[Current reporting rules require inter-period tax allocation whereby the income tax expense reported in the income statement is determined on the basis of pretax book (accounting) income, adjusted for permanent differences between the period's taxable income and book income. The temporary differences accumulate on the balance sheet as a deferred tax liability and are assumed to reverse in future years, gradually reducing the liability. Opponents of interperiod tax allocation argue that reversal of these temporary differences is unlikely or will occur only in the remote future. Thus, support has developed for either partial allocation (e.g., allocating only short-term temporary differences) or no deferral at all. Regardless of such concerns, in 1987 the Financial Accounting Standards Board (FASB) reaffirmed the use of comprehensive interperiod tax allocation. In this study, we perform cross-sectional analyses relating unexpected stock returns around news disclosures about the Tax Reform Act of 1986 to pertinent firm characteristics in an attempt to assess whether the deferred tax liability is viewed as a liability. The main findings of the study are consistent with the hypothesis that investors view the deferred tax liability as a real liability. They appear to discount it according to the timing and likelihood of the liability's settlement. The remainder of the article is organized as follows. Section I describes the previous research on the informativeness of tax deferrals, outlines the hypotheses of this study, and details the procedures used to test them. Section II presents and discusses the results, and the final section provides concluding remarks.]

Presents cross-sectional analyses relating unexpected stock returns around news disclosures about the Tax Reform Act of 1986 (TRA) in the United States in the valuation of deferred tax liability. Previous research on the informativeness of tax deferrals; Study hypotheses and testing procedures; Events leading to the enactment of the TRA; Descriptive statistics.

The paper relates two phenomena in the stock market: the high return during the month of January and the apparent existence of widespread sales of stocks for tax purposes towards the end of the fiscal year. The findings suggest that, due to the tax-induced sales, the price of many stocks over the last 35 years was temporarily depressed in December but recovered in the following January. This price recovery is a major contributor to the high returns observed in January. The tax effect is present in firms of all sizes but much more pronounced for small firms. The analysis also indicates that a more precise identification of the tax-switch candidates may prove that the tax-induced sales are, in fact, the sole contributor to the high January's returns.

The paper relates two phenomena in the stock market: the high return during the month of January and the apparent existence of widespread sales of stocks for tax purposes towards the end of the fiscal year. The findings suggest that, due to the tax‐induced sales, the price of many stocks over the last 35 years was temporarily depressed in December but recovered in the following January. This price recovery is a major contributor to the high returns observed in January. The tax effect is present in firms of all sizes but much more pronounced for small firms. The analysis also indicates that a more precise identification of the tax‐switch candidates may prove that the tax‐induced sales are, in fact, the sole contributor to the high January's returns.