Incorporating Financial Statement Information to Improve Forecasts of Corporate Taxable Income

55 Pages Posted: 5 Mar 2020

See all articles by Danielle Green

Danielle Green

Fordham University

Erin Henry

University of Arkansas - Department of Accounting

Sarah Parsons

Sacred Heart University

George A. Plesko

University of Connecticut School of Business

Date Written: February 5, 2020

Abstract

We contribute to the research on the information content of earnings as it applies to the forecasting of economic activity across reporting models. We examine whether publicly available financial statement information is incrementally useful in forecasting confidentially reported taxable income. More precise firm-level taxable income forecasts can improve policymakers’ modeling of the tax system and their ability to analyze the effect of proposed changes in corporate tax law. When aggregated, improved micro-forecasts can also yield more accurate macro-forecasts of corporate taxable income, a significant component of the federal budget. We find that financial statement information improves firm-level estimates of future taxable income by providing more timely information. We also document the usefulness of the deferred tax valuation allowance in improving taxable income estimates for loss firms. Our evidence suggests public financial statement information complements proprietary data to improve estimates of future taxable income for budgetary and policy use.

Keywords: taxable income; tax policy; forecasting; financial reporting

JEL Classification: M41, M48, H25

Suggested Citation

Green, Danielle and Henry, Erin and Parsons, Sarah and Plesko, George A., Incorporating Financial Statement Information to Improve Forecasts of Corporate Taxable Income (February 5, 2020). Available at SSRN: https://ssrn.com/abstract=3532559 or http://dx.doi.org/10.2139/ssrn.3532559

Danielle Green

Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States

Erin Henry (Contact Author)

University of Arkansas - Department of Accounting ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Sarah Parsons

Sacred Heart University ( email )

5151 Park Ave
Fairfield, CT 06432
United States

George A. Plesko

University of Connecticut School of Business ( email )

School of Business
Storrs, CT 06269-2041
United States
860-486-6421 (Phone)

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