Is There Information Content in the Tax Footnote?
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)
December 17, 2011
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.
Number of Pages in PDF File: 58
Keywords: book-tax differences, tax footnote, information content
JEL Classification: G12, H25, K34, M41
Date posted: October 3, 2010 ; Last revised: September 20, 2012