Influence of countries’ tax enforcement on the relationship between tax expenditure surprise and the accuracy of financial analysts’ earnings forecasts

Objective: To examine the influence of countries’ tax enforcement on the relationship between tax expensesurprise and the accuracy of financial analysts’ earnings forecasts. Method: Data from a sample of 4,775companies across 35 countries from 2001 to 2019 were analyzed using descriptive statistics, correlationanalysis, and Ordinary Least Squares (OLS) regression tests.Results: Financial analysts systematically issue optimistic earnings forecasts, and tax expense surpriseis incrementally relevant to earnings surprise in explaining analysts’ future errors. These informationintermediaries do not efficiently incorporate tax information when issuing their earnings expectations. Thefindings indicate that analysts use tax information more effectively and improve the accuracy of earningsforecasts in environments with high levels of tax enforcement. However, the results were insignificantwhen U.S. companies were excluded from the sample.Contribution: These findings underscore the importance of tax enforcement and tax information inshaping financial analysts’ expectations about future performance, contributing to greater efficiency inthe capital market.