Assessing the Market Reaction to Unfavorable Tax Settlements: Using Textual Analysis to Categorize Ambiguous Tabulated Disclosures

51 Pages Posted: 16 Jan 2014 Last revised: 20 May 2017

See all articles by Andrew M. Bauer

Andrew M. Bauer

University of Waterloo - School of Accounting and Finance

Kenneth J. Klassen

University of Waterloo - School of Accounting and Finance

Date Written: May 5, 2017

Abstract

We examine the financial statement disclosures that accompany settlements of uncertain tax benefits (UTB) to explore the market reaction to disclosure through tabular format and qualitative description. We use textual analysis to develop a measure of the similarity between tax footnotes and a tax settlement-specific list of terms capturing unfavorable outcomes. After demonstrating that this proxy is associated with a subset of manually verified unfavorable settlements, we examine whether the market reacts to disclosure of these negative events. Consistent with extant literature that suggests UTB disclosures are much larger than eventual settlements, evidence from our short-window abnormal returns analyses supports that investors negatively value the unfavorable settlements, as captured by our proxy, but only in the presence of tabular settlement data. Our research adds to the literature that examines how investors assimilate footnote disclosures. Our research also provides a method to classify routine but ambiguous tabular financial statement disclosures, and demonstrates specifically the value relevance of certain UTB information.

Keywords: disclosure form, tax settlement, textual analysis, uncertain tax benefit

JEL Classification: M41, H25

Suggested Citation

Bauer, Andrew M. and Klassen, Kenneth, Assessing the Market Reaction to Unfavorable Tax Settlements: Using Textual Analysis to Categorize Ambiguous Tabulated Disclosures (May 5, 2017). Available at SSRN: https://ssrn.com/abstract=2379666 or http://dx.doi.org/10.2139/ssrn.2379666

Andrew M. Bauer (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Ave W
Waterloo, Ontario N2L 3G1
Canada

Kenneth Klassen

University of Waterloo - School of Accounting and Finance ( email )

Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x38550 (Phone)
519-888-7562 (Fax)

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