Corporate Tax Reserves, Firm Value, and Leverage

34 Pages Posted: 24 Jan 2008 Last revised: 2 Jun 2019

See all articles by Wei-Ling Song

Wei-Ling Song

Louisiana State University

Alan L. Tucker

Pace University - Lubin School of Business

Date Written: January 23, 2008


New accounting rule FIN 48 compels public corporations to disclose how much money they have reserved for financial reporting purposes in order to pay the U.S. and foreign governments in the event that tax-saving transactions are successfully challenged by the IRS and other taxing authorities. Tests using a sample of 273 industrial firms whose 2007:I 10-Q filings adhered to the new reporting requirement indicate that the amount of reserves is a significantly positive determinant of firm value regardless of endogeneity control. Profitable high-reserve firms both reduced their reserve levels and significantly increased their leverage from 2005 to 2007, suggesting tax-sheltering activities being displaced by more debt utilization prior to the mandatory FIN 48 reporting. This result complements Graham and Tucker (2006) who report that tax sheltering appears to be a significant determinant of corporate debt utilization.

Keywords: FIN 48, taxes, tax reserves, tax shelters, firm value, leverage

JEL Classification: G12, G32, K34, M41, M44

Suggested Citation

Song, Wei-Ling and Tucker, Alan L., Corporate Tax Reserves, Firm Value, and Leverage (January 23, 2008). Available at SSRN: or

Wei-Ling Song (Contact Author)

Louisiana State University ( email )

Baton Rouge, LA 70803
United States
225-578-6258 (Phone)
225-578-6366 (Fax)

Alan L. Tucker

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States

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