I examine whether analysts' tax forecasts are informative to investors and whether analysts' tax forecasts impact firm behavior. Using I/B/E/S data from 2002–2014, I find that investors utilize both analysts' pre- and after-tax earnings forecasts in evaluating firm performance, indicating analysts' tax forecasts are value-relevant. Furthermore, evidence that investors discount earnings management through the income tax expense is limited to firms with tax forecast coverage. In examining the impact of analysts' tax forecasts on firm behavior, I find analysts' tax forecast coverage is positively associated with quantitative and qualitative tax footnote disclosure. The results suggest that analysts' tax forecasts are value-relevant and that analysts' tax coverage impacts firm decisions related to the income tax expense account. This evidence informs academics and practitioners as to the role of analysts' tax forecasts.

This study investigates the relation between audit regulation and cost of equity capital. There is scant empirical evidence on this relation because changes in audit regulation are frequently accompanied by other major regulatory changes. We exploit variation in the timing of regulatory changes induced by foreign governments' staggered allowance of PCAOB inspections. Using a difference‐in‐differences design, we find that foreign SEC registrants with auditors from countries that allow PCAOB inspections enjoy a lower cost of capital, relative to foreign SEC registrants with auditors from countries that prohibit inspections. Furthermore, we find that this cost of capital effect is attenuated for companies with higher‐quality governance mechanisms. Finally, we document that inspection access is associated with higher‐quality analyst forecasts, which suggests that this change in audit regulation reduces information risk for market participants.

The objective of this study is to examine managerial involvement in auditor selection decisions when audit committees are “directly responsible” for auditor relationships, including selection of the audit firm. The Sarbanes‐Oxley Act (SOX) of (2002) requires fully independent audit committees to be “directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm” (Section 301). This statutory requirement is a regulatory attempt to eliminate management influence over the external auditor and align auditor incentives with those of the board and shareholders.1 While regulators largely assume that audit committees take responsibility for auditor selection in the post‐SOX period (Doty 2011), there exists no archival analysis testing this assumption. Therefore, the effectiveness of this regulation (SOX Section 301) remains uncertain. In this paper, we examine (a) whether contrary to the intent of SOX, managers continue to influence auditor selection decisions in the post‐SOX period, and (b) whether this influence subsequently impairs auditor independence as presumed in the legislation.