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Is There Information Content in the Tax Footnote?

58 Pages Posted: 3 Oct 2010 Last revised: 20 Sep 2012

Jana Smith Raedy

University of North Carolina at Chapel Hill

Jeri K. Seidman

University of Virginia - McIntire School of Commerce

Douglas A. Shackelford

University of North Carolina Kenan-Flagler Business School; National Bureau of Economic Research (NBER)

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Date Written: December 17, 2011

Abstract

This paper assesses the extent to which the disaggregated book-tax differences (BTDs) detailed in the tax footnote are associated with earnings persistence and growth, and the extent to which these associations matter to investors. Using hand-collected data from the schedule of deferred tax assets and liabilities and rate reconciliations in the tax footnotes of the Fortune 250 from 1993 to 2007, we find associations between various BTDs and persistence and future growth in earnings. However, we find no evidence that the market prices the BTDs that are associated with earnings persistence and growth differently from other BTDs. The results are consistent with investors ignoring the details in the tax footnote, because the tax footnote is complex, requires accounting and tax expertise, may be obfuscated to protect proprietary information from the taxing authority, and/or is not prominently displayed in the financial statements.

Keywords: book-tax differences, tax footnote, information content

JEL Classification: G12, H25, K34, M41

Suggested Citation

Raedy, Jana Smith and Seidman, Jeri K. and Shackelford, Douglas A., Is There Information Content in the Tax Footnote? (December 17, 2011). Available at SSRN: https://ssrn.com/abstract=1686036 or http://dx.doi.org/10.2139/ssrn.1686036

Jana Smith Raedy

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-7475 (Phone)
919-962-4727 (Fax)

Jeri K. Seidman

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

Douglas A. Shackelford (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3197 (Phone)
919-962-4727 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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