Abstract

http://ssrn.com/abstract=1300574
 
 

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Firm and Investor Responses to Uncertain Tax Benefit Disclosure Requirements


Leslie A. Robinson


Dartmouth College - Tuck School of Business

Andrew Schmidt


North Carolina State University

March 7, 2013

Tuck School of Business Working Paper No. 2009-59

Abstract:     
We examine whether proprietary costs affect disclosure quality and how investors react to disclosure quality in a new proprietary cost setting. We apply Verrecchia’s (1983) proprietary cost theory to the FIN 48 adoption setting and argue that proprietary costs result from beliefs that the new disclosures could weaken a firm’s competitive position when negotiating with tax authorities. FIN 48 is an ideal setting to examine how proprietary costs affect disclosure given the proprietary nature of uncertain tax positions, and the ability to construct objective measures of both proprietary costs and disclosure quality. We construct disclosure quality scores for S&P 1500 firms and offer two empirical findings. First, we find a negative association between proprietary costs and disclosure quality. Second, investors reward firms for low disclosure quality, especially small firms and firms with high proprietary costs. Both findings are consistent with Verrecchia’s (1983) theory, and suggest that proprietary costs moderate investor demand for full disclosure.

Number of Pages in PDF File: 45

Keywords: Mandatory Disclosure, FIN 48 (ASC 740-10), Proprietary Costs, Disclosure Quality, Tax Avoidance

JEL Classification: G14, L15, M41, M44, M45

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Date posted: November 13, 2008 ; Last revised: March 19, 2013

Suggested Citation

Robinson, Leslie A. and Schmidt, Andrew, Firm and Investor Responses to Uncertain Tax Benefit Disclosure Requirements (March 7, 2013). Tuck School of Business Working Paper No. 2009-59. Available at SSRN: http://ssrn.com/abstract=1300574 or http://dx.doi.org/10.2139/ssrn.1300574

Contact Information

Leslie Robinson
Dartmouth College - Tuck School of Business ( email )
Hanover, NH 03755
United States
603-646-4018 (Phone)
Andrew P. Schmidt (Contact Author)
North Carolina State University ( email )
Raleigh, NC 27695-8113
United States
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