A Tale of Two Forecasts: An Analysis of Mandatory and Voluntary Effective Tax Rate Forecasts

Abstract

We exploit a setting where firms provide two forecasts of the same underlying metric – effective tax rates (ETRs) – to examine the interaction between voluntary and mandatory disclosures. The integral method (ASC 740-270) requires firms to forecast de facto annual ETRs while some firms additionally provide voluntary ETR forecasts in earnings calls. Using a self-constructed dataset of voluntary ETR forecasts, we document that managers are more likely to issue voluntary ETR forecasts when tax complexity is higher. More importantly, voluntary ETR forecasts are incrementally informative over mandatory ETR forecasts as analysts revise their ETR forecasts based on the news in voluntary ETR forecasts, especially for voluntary non-GAAP ETR forecasts and in the presence of discrete tax items. Overall, our results suggest that managers resort to voluntary disclosure when mandatory disclosure constrains their ability to convey private information, thus we offer new insights on the interaction between voluntary and mandatory forward-looking disclosures.