Tax Havens and Disclosure Aggregation
Herita T. Akamah
University of Nebraska at Lincoln - School of Accountancy
University of Toronto - Rotman School of Management
Wayne B. Thomas
University of Oklahoma - Michael F. Price College of Business
August 6, 2016
Rotman School of Management Working Paper No. 2419573
Multinational firms’ ability to avoid taxes by shifting profits to low-tax geographic areas is often severely criticized by politicians, regulators (both domestic and foreign), and citizen groups. In this study, we are interested in how firms adjust their discretionary disclosures of geographic operations when operating in tax havens. We develop novel measures of geographic disclosure quality by manually matching the countries of firms’ foreign subsidiaries listed in Exhibit 21 of the Form 10-K to the aggregation level of geographic disclosures in the segment note (e.g., country versus continent versus total foreign). Using these hand-coded measures of 2,774 unique geographic titles disclosed by our sample firms and employing both association and changes analyses, we find that firms with tax havens are more likely to aggregate their geographic disclosures (i.e., provide lower-quality disclosures). The evidence is consistent with managers’ discretionary disclosures being affected by strong criticisms of firms’ tax-avoidance practices. We further find that the association between tax havens and disclosure aggregation is more severe for larger firms (i.e., firms with higher political costs) and for firms in natural-resources industries, in retail industries, or with low competition. This study offers evidence relevant to financial reporting policy makers and others who are interested in the relation between financial reporting and tax-related activities of multinational firms.
Number of Pages in PDF File: 55
Keywords: Tax havens, aggregation, disclosure quality, tax avoidance, segment disclosure, Exhibit 21
JEL Classification: H25, H26, F23, F30, M41, G30
Date posted: April 4, 2014 ; Last revised: August 11, 2016
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