Did the FASB’s simplification initiative increase errors in analysts’ implied ETR forecasts? Evidence from early adoption of ASU 2016-09

Part of the FASB’s broader simplification initiative, ASU 2016-09 was issued on March 30, 2016 and became effective for all firms for fiscal years beginning after December 15, 2016. ASU 2016-09 simplifies the accounting for the tax effects of stock-based compensation by requiring firms to record all related tax windfalls and shortfalls as components of current income tax expense rather than as direct-to-equity adjustments, as was required under prior guidance. Many observers note this change may introduce significant volatility and uncertainty into firms’ ETRs. Consistent with this concern, we document that errors in analysts’ ‘‘clean’’ ETR forecasts significantly increased among firms reporting a material ETR effect due to early-adopting ASU 2016-09, relative to other firms. Our results suggest that simplification came at the cost of a decrease in the predictability of tax-related financial information; as such, this study provides timely evidence on an important economic consequence of ASU 2016-09.