Analysts' Interpretation of Transitory Earnings Components: Evidence from Forecast Revisions after Disclosure of the 1993 Deferred Tax Adjustment

This study examines analyst forecast revisions after the disclosure of firms' deferred tax adjustments following the U.S. Omnibus Budget Reconciliation Act of 1993 (OBRA), which raised the corporate income tax rate from 34 percent to 35 percent. This deferred tax adjustment was a one-time item, and should have had no effect on analyst estimates of future earnings. However, we find that forecast revisions issued after the disclosure of an income-decreasing deferred tax adjustment were positively related to the amount of the adjustment. The complexity of the deferred tax adjustment and the newness of SFAS 109 (which required the adjustment) may have contributed to the failure of analysts to properly interpret this one-time item when revising their earnings forecasts.