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Book-Tax Differences and Financial Analysts’ Recommendations
Xiaoli Yuan,
Florida International University
ABSTRACT. I investigate the role of book-tax differences (measured by tax-to-book income ratio) in indicating the accuracy and dispersion of analysts’ recommendations. I also examine whether the analyst following has effect on efficiency of consensus recommendations with respect to book-tax differences. I find that recommendation scale is negatively related to book-tax differences. I also document that recommendation dispersion is not significantly associated with book-tax differences. I then investigate potential sources of this phenomenon. Based on the assumption and prediction of the naïve investor hypothesis, I argue that low-quality analysts contribute in part to the phenomenon that recommendation dispersion is not significantly associated with book-tax differences. Further, the evidence is consistent with the naïve investor hypothesis that analyst following has positively effect on efficiency of consensus recommendations with respect to book-tax differences.
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